Nasik People'S Co-Operative Bank ... vs Datar Switchgear And Anr.
2007 Latest Caselaw 2067 Del

JUDGMENT

A.K. Sikri, J.

1. This case depicts the usual dilemna which creditors, particularly the secured creditors/financial institutions, are faced with whenever a question of reconstruction and revival of a sick company comes up before the Board for Industrial & Financial Reconstruction (for short, 'BIFR') under the Sick Industrial Companies (Special Provisions) Act, 1985 (hereinafter referred to as 'SICA') or before a Company Judge of the High Court in petitions filed under Section 391-394 of the Companies Act, 1956.

2. The respondent No. 1 company, namely, M/s. Datar Switchgear Ltd. (hereinafter referred to as 'the company'), had approached the BIFR when it had become a sick industrial company. The reference was registered and ICICI Bank was appointed as the operating agency to formulate the scheme. The scheme has been sanctioned by the BIFR to which most of the secured creditors have consented and are ready to accept the dues as per the sanctioned scheme, that too in a staggered manner. However, the petitioner bank feels aggrieved. Admittedly, the principal amount payable by the company to the petitioner was to the tune of Rs.9 crores and according to the petitioner, after adding interest and other charges, the total amount that became payable rose up to Rs.20.36 crores. As per the sanctioned scheme, the petitioner is to be paid Rs.9 crores. The petitioner is even agreeable to this. However, the petitioner wants that this payment be made upfront in lumpsum and not over a period of 7 years, as provided in the scheme. The petitioner had challenged the order of the BIFR by filing an appeal before the Appellate Authority for Industrial & Financial Reconstruction (for short, 'AAIFR'), but was unsuccessful and, in these circumstances, the present petition is preferred.

3. Before adverting to the legal issue that arises, we may take stock of bare minimum facts necessary for determining the controversy involved.

4. The petitioner is a Co-operative Bank governed by the Maharashtra State Co-operative Societies Act, 1960. The respondent is a company registered under the Companies Act having its registered office at Nasik. The petitioner bank also has its registered office at Nasik. The petitioner had advanced a loan in the sum of Rs. 9 crores to the respondent (Rs.3 crores against the security of immovable property and another sum of Rs.6 crores towards unsecuredloan). In the year 2001-02, the company started defaulting in payment of its dues and, thus, became one of the Non-Performing Assets (NPA) of the petitioner bank. Since the company had become sick, it filed a reference with the BIFR, which was registered as BIFR Case No. 260/2001. On 31.7.2002, BIFR declared the company as a sick industrial company under Section 3(1)(o) of the SICA. The process of rehabilitation/re-construction of the company accordingly started. In the month of June 2005, it submitted a draft rehabilitation proposal to all the secured creditors, including the petitioner bank. Some modifications were made to this proposal and the modified rehabilitation proposal was submitted again to all the secured creditors, based on which a joint meeting of the creditors was held on 5.12.2005. All the secured creditors approved the proposal. Case of the petitioner bank is that it objected to the same, but was overruled by the company and other creditors, though the company maintains that even the petitioner had agreed to this proposal. We shall advert to this aspect at a later stage.

5. Proceeding further with subsequent events, we may mention that BIFR thereafter passed orders dated 29.6.2006 circulating the draft rehabilitation scheme to all the concerned parties, including the petitioner bank, under Section 19(2) read with Section 19(1) of the SICA Act inviting their objections/suggestions. Thereafter, BIFR held its sitting on 14.9.2006 and approved the scheme. As per this scheme, the petitioner bank is to be paid in a phased manner as under:

Restructured Term Loan of Rs.183.76 lacs + Unsecured Zero Coupon Bonds of Rs.585 lacs + Down Payment of Rs.131.24 lacs = Rs.900 lacs. Accordingly, as per the scheme, the petitioner was entitled to receive the said monies in a phased manner and not as down payment as allegedly demanded by the petitioner bank.

6. The petitioner maintains that even during the hearing held on 14.9.2006, it had submitted its objection and made it clear that its demand was to receive the entire payment of Rs.9 crores upfront, which was reiterated earlier vide letter dated 11.8.2006 as well. However, when the copy of the order was received on 10.10.2006, the Bank was shocked to notice that its submissions were not recorded and contrarily in the order BIFR had stated that no creditors had raised any objections. The petitioner, on this premise, preferred an application for rectification of the order. The BIFR, vide its orders dated 5.12.2006, proceeded to make certain modifications in the Rehabilitation Scheme, which was approved on 14.9.2006.

Feeling aggrieved, the petitioner bank preferred an appeal before the AAIFR (being Appeal No. 69/2007) on 25.1.2007, which has been dismissed vide orders dated 24.7.2007. The present petition is filed challenging this order.

7. We may, at this stage, take note of two other proceedings which took place during the intervening period. According to the petitioner, due to the mounting number of NPAs in the bank, the Reserve Bank of India, in exercise of its powers under Section 35A read with Section 56 of the Banking Regulation Act, 1949 issued directions to the petitioner bank whereby with effect from 4.6.2004 the RBI precluded the petitioner from incurring fresh liabilities, including grant of loans, borrowing of funds and acceptance of fresh liabilities or making any payments or discharging any liabilities or obligations, except without prior permission of the RBI in writing. This resulted in suspension of the operations of the petitioner bank. According to the petitioner, as it is a co-operative bank, the action of the BIFR has put in jeopardy the deposits of various depositors, most of whom are pensioners and salaried people, who are its members. The petitioner's case is that it always wanted the entire payment upfront to ease out its own financial crunch which it is facing. In these circumstances, the petitioner also preferred an application under Section 101 of the Maharashtra Co-operative Societies Act, 1960 before the Assistant Registrar and in those proceedings Recovery Certificate was also issued. However, the company preferred a writ petition in the High Court of Bombay challenging the issuance of the Recovery Certificate and obtained stay of the execution thereof.

8. While the rehabilitation scheme was pending consideration before the BIFR, the company had also preferred a petition under Section 391 of the Companies Act in June 2006 before the High Court of Bombay and the High Court had directed, vide orders dated 14.7.2006, convening of a meeting of all the secured creditors. According to the petitioner, it has submitted its objections in detail to the sanctioned scheme vide its letter dated 11.8.2006 and demanded upfront payment of Rs.9 crores. The plea of the petitioner bank is that it is this letter which was placed before the BIFR also on 14.9.2006, when hearing took place before the BIFR, and the BIFR had passed the order for sanctioning the scheme ignoring this objection.

9. The petition is resisted by the company by raising preliminary objection to the effect that the objection to the scheme was an afterthought as initially the petitioner had not raised any such objection and agreed to the draft rehabilitation scheme. On merits it is argued that when all the creditors, except the petitioner, have agreed to the said scheme, which treats all the secured creditors in the same manner, and the scheme has been sanctioned, which would rehabilitate the company, the petitioner should not be allowed to frustrate the scheme. It was submitted that it is not possible to make the payment to the petitioner bank upfront as that would not only disturb the entire equilibrium but may precipitate further problems, inasmuch as, other creditors would also start approaching the judicial fora for similar treatment, which may have a snow-boiling effect, consequences whereof could be to frustrate the entire scheme and reconstruction of the company, which is not the purpose and objective of SICA. It was also argued that when the effect of the scheme is seen in totality, the petitioner stands to gain, inasmuch as, otherwise it would have recovered a negligible amount.

10. Before dealing with the contentions, it would be necessary to scan through the relevant provisions of the scheme in order to find out as to what it provides.

11. The company is engaged in the manufacture and marketing of electrical engineering products and solutions. It has two business segments, namely, electrical business and electronic business. The electrical business is the flagship business and comprises switchgear products. It has its manufacturing facilities for both business in MIDC Ambad on the outskirts of Nasik. According to the sanctioned scheme, the company's trademark 'DATAR' is reputed in the market. The operations of the company were profitable till the mid 1990s. It had recorded an impressive growth in turnover and profitability uptil 1996-97. However, it entered into a long term lease based contract with the Maharashtra State Electricity Board for supply of LT Load Management Systems. The said contract went into dispute and the company invoked arbitration proceedings. The company had borrowed debt from institutions and banks to finance the said project. Due to the termination of the contract, there was a collapse in the business of the company and serious financial crunch followed as a consequence thereof. The company started incurring losses and could not meet its debt related obligations. These losses resulted in eroding the company's networth resulting in sickness. The company had taken loans from various financial institutions. Total principal amount was Rs.123.92 crores, and the total outstanding after adding interest was Rs.337.19 crores. Out of this, the amount payable to the petitioner bank was, with interest, Rs.20.36 crores (principal amount being Rs.9 crores, namely, Rs.3 crores secured and Rs.6 crores unsecured). M/s. Larsen & Toubro Ltd. (hereinafter referred to as 'L&T') agreed to pump-in funds for the purpose of rehabilitation of the company. It was proposed that electrical business be divested to L&T; debts be restructured and repayment of the restructured debts be made by L&T. The scheme provided that there would be immediate cash infusion to settle and discharge statutory liabilities such as Sales-Tax liability. Likewise, all outstanding salaries and wages of the employees are being cleared. The deficiency in contribution to the provident fund, ESI, Maharashtra Labour Fund is also made up. There is a provision for payment of provisional taxes as well. All the employees are to be taken over by L&T and, therefore, without losing their employment they would become the employees of a 'reputed engineering company'. Because of this reason, the workers union of the company has also conveyed its support to the Transaction with L&T. The electrical business of the company, which is its flagship business having significant technological achievements to its credit as well as track record of product quality is going to survive when it would be undertaken by L&T. It would also mean productive use of the company's technology, facilities and man power. Total cash consideration for the Transaction is Rs.24 crores and L&T has agreed to provide the same by depositing Rs.17 crores and Rs.7 crores in two separate escrow accounts opened with the Operating Agency, i.e. the ICICI Bank. The scheme also provides for restructuring of debt to secured as well as unsecured creditors. Thus, not only secured but even unsecured creditors are going to get their money, though over a period of time.

12. The contention of the petitioner bank is to be examined in the aforesaid background. We may state at the outset that though it is disputed by the petitioner that it had submitted its objections to the proposed scheme by putting forward its proposal that it wanted the entire payment of principal amount upfront and was giving up interest etc. which had accrued, the order of the BIFR records that the petitioner had given its no objection to the draft rehabilitation scheme. Learned Counsel for the respondent also referred to letter dated 14.11.2006 of the RBI to the Chief Executive Officer of the petitioner bank, which was written in reply to the Bank's letter dated 14.9.2006, para 2 whereof reads as under:

2. Regarding bank's proposal to waive entire interest amount and allow settling only the principal amount in the account of M/s Datar Switchgears Ltd., we have no objection subject to the condition that the terms of settlement are not worse than that offered to any other bank by the company and approval/NOC from Registrar of Co-operative Societies, Maharashtra is also obtained.

Learned Counsel for the respondents submitted that the RBI had given 'No Objection' and the only condition was that the terms of settlement are not worse than that offered to any other bank by the company. Her submission was that this was taken care of as the terms and conditions are identical with that of other banks and all other banks were to be paid in the same manner. Therefore, she sought to argue that there was consent given by the petitioner and as per the provisions of Section 19(2) of SICA the scheme was rightly sanctioned. She also referred to the judgment of the Bombay High Court in the case of Kotak Mahindra Finance Ltd. v. Mafatlal Industries Ltd. 122 Company Cases 231, and particularly the following passage there from:

...Section 19(2) postulates that every scheme referred to in that section shall be circulated to every person required by the scheme to provide financial assistance for his consent within a period of sixty days from the date of such circulation or within such further period, not exceeding sixty days, as may be allowed by the Board, and if no consent is received within such period or further period, it shall be deemed that consent has been given. As mentioned earlier, when the first scheme was formulated, the claimants gave express consent with reservation only regarding the cut-off date, as stated in the minutes dated September 24, 2001. That was consent, in fact. Whereas, before the final scheme was framed, no response was given by the claimants within the specified time, as is mentioned in the minutes dated August 21, 2002. This is consent in law in view of the deeming fiction envisaged in Section 19(2) of the SICA. It is not the case of the claimants that the proposed scheme was not circulated to it at all. Understood thus, the scheme crystallises the claim of the claimants qua the respondent-company in terms of the scheme and the provision made therefore in the scheme and the same is statutorily binding on the claimants.

xx xx xx

Be that as it may, Section 32 of the SICA expressly provides that the provisions of the SICA and of any rules or "schemes" made there under shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force. Understood thus, on conjoint reading of Sections 18(8), 19(2) and 32 of the SICA, the final scheme formulated by the BIFR in respect of the respondent-company not only binds the claimants, but its claim as against the respondent-company is crystallised in accord with the provision made in the said scheme for that purpose.

xx xx xx

...To my mind, although the argument raised on behalf of the claimants seems to be attractive, however, for the reasons already recorded earlier, that the final scheme would bind the claimants being creditor, it would not be entitled for any further claim save and except provided for in the scheme as framed or to be modified in future, having regard to the mandate of the provisions contained in the SICA, the argument deserves to be rejected....

13. Learned Counsel for the petitioner submitted that the aforesaid observation in the order of the BIFR was wrongly recorded, inasmuch as, even prior to the hearing the petitioner had made its stand known to everybody vide letter dated 11.8.2006 that it wanted upfront payment which was necessary for even the survival of the petitioner bank. It was for this reason that the application for rectification was also filed. However, for the purpose of this petition, it may not be necessary for us to go into the issue as to whether the petitioner had given its consent or not as we feel that having regard to the provisions of SICA and in view of the requisite strength of the creditors approving the scheme, no interference in the impugned order is called for.

14. As pointed out above, whenever a company become sick and insolvent, the decision of creditors in the process of revival of such a company becomes delicate. In any insolvency regime, there is an apparent conflict between the issues involved, namely, recovery of the dues of the creditors from the insolvent company, restructuring/ rehabilitation of the insolvent company and effective liquidation process/system to ensure timely liquidation of the companies which cannot be revived. Interests of all groups concerned with these aspects are paramount: whether it be of creditors in the recovery of their debts or that of an insolvent company seeking revival. Above all, public interest, including the economic interest of the nation which is paramount , is subserved only when interest of all the aforesaid groups is protected. It is for this reason that the balancing of these purported rival and antagonist interests becomes a delicate task. All categories of creditors and investors in a company would like to put their money at stake only if they are reasonably confident that they would be able to recover the money invested; be it shareholders, debenture holders or financial institutions giving credit to such a company. Not only they want reasonable returns on the money invested, they want recovery of their investment also in the time of need. If a feeling is generated that money invested may be put in jeopardy, investors may stop making investments. These financial institutions, in turn, mobilize their resources from small investors. Therefore, protection of creditors rights in any system, is sine qua non of a healthy economy. For this reason municipal laws in almost all countries provide the mechanism whereby creditors are able to have recourse to law for recovery of their dues.

15. It is equally important that when an industrial company becomes insolvent first attempt has to be made to rehabilitate and restructure such a company. The reason is obvious. Insolvent industrial companies, when they remain insolvent, result in blockage of sizeable national resources which may have cascading effect on all sectors of economic and social life of the nation. It may, in addition, put the creditors in a spot as it becomes difficult to recover their dues in such an eventuality. The ill-effects of insolvency in industrial companies would be loss of production, loss of employment, loss of revenue to Central and State Governments and locking up of investible funds of banks and financial institutions. To deal with such situations, the Parliament of India enacted the Sick Industrial Companies (Special Provisions)Act, 1985 (SICA). The enactment of this legislation was recognition of the fact that in order to fully utilize the productive industrial assets, to afford maximum protection of employment, and to optimize the use of funds of the banks and financial institutions, it would be imperative to revive and rehabilitate the potentially viable insolvent industrial companies as quickly as possible. This Act operates and is sought to be implemented through a three-tier system, namely, (i) Operating Agency, (ii) the Board, and (iii) the Appellate Authority. The Operating Agency is essentially the hand-tool of the Board to carry out investigations and implement legislative provisions. The scheme of the Act visualises:

(a) the initiation of a reference and determination by the Board of the insolventness of a company;

(b) the enquiry, consideration and determination by the Board whether the insolvent industrial company can on its own within a reasonable time make its `net worth positive', and if not, then the formulation of a scheme of revival in respect thereof;

(c) in order to see as to whether it is feasible to draw a rehabilitation scheme, an Operating Agency, normally one of the secured financial institution, is appointed;

(d) in case the Operating Agency reports that under the given circumstances the scheme is not feasible, on the said report, or otherwise, the BIFR has to take a view as to whether such a scheme is not practicable or that the financial assistance, concessions and reliefs necessary to make the scheme successful are not forthcoming and, therefore, the formation of an opinion by the Board that it is just and equitable to wind up the company; and

(e) in case draft scheme is submitted, the BIFR invites comments/objections thereupon from all concerned and at that stage the consideration is as to whether such a scheme is to be approved, with or without modifications, or it is to be rejected.

These are essentially jurisdictional parameters of the Board and beyond these, it cannot and need not travel. Till the whole exercise is gone through, the jurisdiction and parallel proceeds under all other acts (to the extent provided in Sections 22 & 23 of SICA) cannot lie or be proceeded with.

Once the scheme is approved by the Board, after completing all necessary formalities as required, it becomes binding on everyone, including the creditors.

Of course, such an order of the BIFR is subject to further judicial review in the form of appeal before the AAIFR and writ petition in the High Court under Article 226 of the Constitution of India.

16. Though track record of the functioning of BIFR may not be very encouraging and, therefore, there is a thought to revamp the entire legal framework relating to re-construction/rehabilitation of the companies and to introduce these provisions exhaustively in the Companies Act, 1956 by enacting a new legislation which may be on the anvil, it is not necessary for us to discuss those aspects. Wherever the BIFR is able to rehabilitate a sick company, such effort has to be appreciated and the approach of the courts, in such cases, is to ensure that spokes are not put in the process of rehabilitation.

17. No doubt, in the present case the bank needs immediate liquidity for its own survival and after it has given up its claim for interest etc., not getting the entire principal dues upfront, and receiving payment in a phased manner may not be conducive to its own health.

18. At the same time, we have to bear in mind as to what would be the consequences if the approval to the scheme is to be set aside. In that event, probably, the bank may not even recover what it is going to receive now. As pointed out above, the secured credit of the bank is only Rs.3 crores. Remaining amount of Rs.6 crores of principal amount is unsecured. Assets of the company, if it is forced into liquidation, may be much less than the statutory dues payable, amounts due to all the secured creditors as well as payments to the workers. There is one property mortgaged with the bank. However, we were told that the value of the property is not more than Rs.3-4 crores and the petitioner bank is not the only bank to have charge over the said property as other secured creditors have also pari passu charge. Therefore, even if the said property is sold, the petitioner bank would be able to realise an insignificant part of even its secured debt. That would be much less than the amount of Rs.9 crores offered now, and may be even less than the upfront payment that it is entitled to receive under the sanctioned scheme of Rs.131.24 lacs, i.e. about Rs.1.30 crores. On the other hand, the other players in the game, namely, secured creditors, workers and unsecured creditors, would all stand to lose. The secured creditors and workers would, like the petitioner, be able to salvage miniscule part of their debt and the unsecured creditors would not be able to get anything. All the workers would lose their employment as well. Keeping in view these considerations, no doubt, it is a Hobson's choice for the petitioner to face the harsh reality that the other alternative, namely, forcing the scheme to go burst, is more disadvantageous not only to the petitioner but to all others concerned.

Thus, not only on the legal front but even in equity the alternative, i.e. approval of the scheme which is accepted by all other stakeholders, is more appropriate.

19. We may deal with one more submission of learned Counsel for the petitioner which was strenuously argued. It was mentioned that though the major portion of the dues are payable over a period of 7 years, at the same time, the scheme provides for discharging the security, as encumbrance over the property in favor of the petitioner would no longer remain. He submitted that this was not permissible in law and in case there is a default in making further payments as per the scheme, it may not be even possible to recover the money as per the rehabilitation scheme. For this reason alone we cannot put an end to the scheme otherwise accepted by all the secured creditors who have also given their willingness to give up their charge over the property. However, the apprehension of the petitioner can be taken care of by ensuring that the property in question remains intact during the period the dues of all the creditors, as per the scheme, are cleared.

20. In these circumstances, looking to the larger public interest, and legal position, we have no option but to ignore the personal interest of the petitioner and dismiss the present writ petition. However, at the same time, it is directed that the property bearing No. H-108, MLDD, Ambad, Nasik, shall not be encumbered or third party interest created or possession parted with till the scheme fully works out by making payment to all the creditors.

21. For the foregoing reasons, this writ petition is dismissed.

No costs.