Saketh India Limited vs W. Diamond India Limited
2010 Latest Caselaw 2300 Del

*     IN THE HIGH COURT OF DELHI AT NEW DELHI

+     RFA(OS) 114/2009 & CM Nos.17726-27/2009

Saketh India Limited              .....Appellant through
                                  Ms. Manisha Dhir &
                                  Ms. Preet Dalal, Advs.

                  versus

W. Diamond India Limited          .....Respondent through
                                  None

                  WITH

EFA(OS) 33/2008

Rites Ltd.                        .....Appellant through
                                  Mr. J.C. Seth, Adv.

                  versus

Bihar Sponge Iron Ltd.            .....Respondent through
                                  Mr. Rajeeve Mehra, Sr. Adv.
                                  with Mr. Deepak Khurana,
                                  Adv.

%                           Date of Decision: April 30, 2010

      CORAM:
*     HON'BLE MR. JUSTICE VIKRAMAJIT SEN
      HON'BLE MR. JUSTICE SUNIL GAUR
      1. Whether reporters of local papers may be
         allowed to see the Judgment?               No
      2. To be referred to the Reporter or not?     Yes
      3. Whether the Judgment should be reported
         in the Digest?                             Yes

VIKRAMAJIT SEN, J.

1. The Appellant, Saketh India Limited, assails the impugned

Order of the learned Single Judge passed on 24.8.2009, whereby

two Applications preferred by the Appellant/Defendant were

dismissed and the Suit filed under Order XXXVIII of the Code of

Civil Procedure, 1908 („CPC‟ for short) for the recovery of

mesne profits for the sum of Rupees 31,30,153/- together with

interest and costs was decreed. In the first Application, IA

No.1171/2006, the Appellant/Defendant prayed for condonation

of delay in entering appearance (that is filing the Address

Form). In the second Application, IA No.1170/2006, the

Appellant/Defendant sought the rejection of the Plaint under

Order VII Rule 11(d) of the CPC on the ground that it had been

declared a Sick Industrial Unit in terms of Section 3 (1) (o) of

Sick Industrial Companies (special Provisions) Act, 1985 („SICA‟

for short). Before us, the only aspect that has been argued is

that SICA places a complete prohibition on all judicial

proceedings leaving no alternative to the Trial Judge other than

ordering the rejection of the Plaint.

2. It appears from a perusal of the records that Summons in

Form 4 under Order XXXVII of the CPC were served on

Defendant No.1 by affixation at Hosur, Karnataka on 22.8.2005

and on Defendant No.2 on 30.8.2005 at Bangalore. The

aforementioned Applications filed on behalf of the Defendants

are dated 25.1.2006 and were filed on that very day; they have

been supported by Affidavits of Defendant No.2 who is the

Managing Director of Defendant No.1. On 7.11.2008, the

learned Single Judge directed the Defendants to file, within four

weeks, an affidavit stating whether or not the monies claimed by

the Plaintiff have been admitted by the Defendant and have

been reflected in the documents filed by the Defendant before

the Board for Industrial and Financial Reconstruction („BIFR‟ for

short). On 16.3.2009, the learned Single Judge granted a last

opportunity to file the said Affidavit. On the next date of

hearing, viz., 19.5.2009, the submission made on behalf of the

Plaintiff to the effect that the Defendant was not before BIFR

was recorded. In response, the Defendant stated that

proceedings were pending before Appellate Authority for

Industrial and Financial Reconstruction („AAIFR‟ for short). Yet

another opportunity to file the aforementioned Affidavit was

granted to the Defendant, subject to payment of costs of Rupees

5,000/-. Since the directions were not complied with, costs were

increased to Rupees 10,000/- and another chance for filing the

said Affidavit before 24.8.2009 was permitted.

3. On 24.8.2009, the Court, keeping in perspective the

plentitude of opportunities granted but not availed of by the

Defendants to file the required Affidavit, as well as the

Defendants failure to pay costs, dismissed both the Applications.

The Court took into consideration that delay in entering

appearance had not been condoned and, therefore, opined that

all the averments in the Plaint were deemed to have been

admitted, and decreed the Suit. This Appeal arises before us in

these circumstances.

4. We are not persuaded by the arguments of learned

counsel for the Appellant that the provisions of SICA should be

applied to the facts of the present case. Assuming that there is a

prohibition placed, and not just a moratorium, placed by Section

22 of SICA on legal proceedings against a company coming

within the pale of that statute, it remained the legal duty of the

Appellant to substantiate that it had qualified for that

protection. For discharging this obligation, the Defendant

should have complied with the Orders passed by the learned

Single Judge and made good the submission that the

proceedings under SICA with relation to the Appellant were

pending in a manner such that the benefit of Section 22 of SICA

would enure to the Appellant. Secondly, the Appellant should

have paid costs imposed upon it; it has, without demur, paid

Rupees 33,000/- as Court Fee in this Appeal. Thirdly, the

Appellant should have disclosed that at least the principal

amount claimed by the Plaintiff in the Summary Suit had been

shown and disclosed in the Scheme formulated and laid before

the BIFR. Having failed to do so, we are in complete agreement

with the learned Single Judge that the averments made in the

Plaint would, in the absence of a Written Statement, have to be

presumed to be correct. The CPC now mandates that the

Written Statement must be filed within thirty days and in

exceptional circumstances not later than ninety days of service.

The rigours of this provision are not circumvented by preferring

an application under Order VII Rule 11 of the CPC. We,

therefore, conclude that the Appeal, inasmuch as it challenges

the impugned Judgment, is bereft of merit.

5. We think it appropriate, however, to consider the

provision of SICA and analyse what it endeavours to achieve.

We must immediately take note of the fact that SICA has been

repealed by Sick Industrial Companies (Special Provisions)

Repeal Act, 2003. While it is yet to be notified, it is significant

that provisions akin to Section 22 are conspicuous by their

absence in the new Scheme of revival of sick companies

inserted in form of Part VIA, namely, "Revival and Rehabilitation

of Sick Industrial Comapnies". Obviously, empirical analysis

discloses that more often than not companies which have sought

shelter of SICA have done so to procrastinate, delay and defer

clearing its liability, with the obvious intention of coercing

creditors into unfair settlements rather than implementing

projected schemes supposed to assist in their reconstruction.

When the statute is notified, amendments to the Companies Act,

1956 will become effective and all proceedings pending before

BIFR will stand abated. To some extent, therefore, the present

controversy has been rendered academic.

6. Courts, however, have always been alive to the possible

mischief that invocation of SICA can lead to. In a nutshell,

where the net worth of a company is reduced to a negative, and

the amelioration that is sought is for reviving the company

rather than winding it up, the recourse to the Act would be

legitimate. There is no justifiable reason, therefore, for all legal

proceedings to be immediately even held in abeyance, if not

dismissed. We are mindful of the fact that Parliament has

incorporated an amendment in the Section with effect from

1.2.1994 in these words - "no suit for the recovery of money or

for the enforcement of any security against the industrial

company or of any guarantee in respect of any loans or advance

granted to the industrial company - shall lie or be proceeded

with further, except with the consent of the Board, or as the

case may be, the Appellate Authority". It appears to us that the

phrase "recovery of money" must be construed ejusdem generis

and accordingly recovery proceedings in the nature of execution

or any other coercive enforcement that has been ordained to be

not maintainable. We do not find any logic in holding legal

proceedings to be not maintainable, or to be liable to be halted

unless, even if the debt sought to be proved in the Plaint has not

been admitted. Given the delays presently endemic in the justice

delivery system if a creditor is disallowed even from proving the

indebtedness of a recalcitrant debtor SICA company, it would

cause unjustified hardship. Whichever way we look at the

matter, there can be no logic in denying legal recourse to a

party for proving its debt. In the event that at least the principal

amount, or a substantial part of it stands admitted, either in the

suit or by means of a mention in the Scheme placed before the

BIFR, the aggrieved party must be permitted to prove its claim.

In holding so, the only prejudice that we can conceive of is

incurring expenditure in legal fees. When this is weighed

against the interests of a person claiming that the company is

indebted to it, the balance tilts in favour of the latter. A holistic

reading of Section 22(1) of SICA makes it manifestly clear that

Parliament‟s intention was to insulate sick companies only

against proceedings for winding-up or for execution, or distress

or the like or for enforcement of any security or guarantee. In

the case in hand, despite several opportunities granted to the

Appellant, it has miserably and perhaps deliberately failed to

substantiate that the claim mentioned in the Suit has been

reflected in the Scheme placed before the BIFR but even more

poignantly, that a scheme was, in fact, pending before BIFR. If

an Appeal is pending, has BIFR failed to grant or has withdrawn

registration under SICA. We see the conduct of the Appellant as

nothing more than an abuse of SICA.

7. The Apex Court has in Deputy Commercial Tax Officer -vs-

Corromandal Pharmaceuticals, [1997] 10 SCC 649 enunciated

the law in the context of SICA to be that a cessation of legal

proceedings would be justified only if the dues in respect of

which adjudication is ongoing is also included in or within the

contemplation of the Scheme presented to BIFR. Their

Lordships had analysed and distinguished its previous decisions

in Gram Panchayat -vs- Shree Vallabh Glass Works Limited,

[1990] 2 SCC 440 as well as Maharashtra Tubes Ltd. -vs- State

of Industrial and Investment Corporation of Maharashtra Ltd.,

[1993] 2 SCC 144 on the reasoning that in those cases the

liability of the sick company had arisen for the first time after

the sanction of the Scheme by BIFR. Their Lordships observed

thus:

Any step for execution, distress or the like against the properties of the industrial company other of similar as steps should not be pursued which will cause delay or impediment in the implementation of the sanctioned scheme. In order to safeguard such state of affairs, an embargo or bar is placed under Section 22 of the Act against any step for execution, distress or the like or other similar proceedings against the company without

the consent of the Board or, as the case may be, the appellate authority. The language of Section 22 of the Act is certainly wide. But, in the totality of the circumstances, the safeguard is only against the impediment, that is likely to be caused in the implementation of the scheme. If that be so, only the liability or amounts covered by the scheme will be taken in, by Section 22 of the Act. So, we are of the view that though the language of Section 22 of the Act is of wide import regarding suspension of legal proceedings from the moment an inquiry is started, till after the implementation of the scheme or the disposal of an appeal under Section 25 of the Act, it will be reasonable to hold that the bar or embargo envisaged in Section 22(1) of the Act can apply only to such of those dues reckoned or included in the sanctioned scheme. Such amounts like sales tax, etc, which the sick industrial company is enabled to collect after the date of the sanctioned scheme legitimately belonging to the Revenue, cannot be and could not have been intended to be covered within Section 22 of the Act. Any other construction will be unreasonable and unfair and will lead to a state of affairs enabling the sick industrial unit to collect amounts due to the Revenue and withhold it indefinitely and unreasonably. Such a construction which is unfair, unreasonable and against spirit of the statute in a business sense, should be avoided.

The situation which has arisen in this case seems to be rather exceptional. The issue that has arisen in this appeal did not arise for consideration in the two cases

decided by this Court in Gram Panchayat and Anr. v.

Shree Vallabh Glass Works Ltd. and Ors., [1990]1SCR966 and Maharashtra Tubes Ltd. v. State Industries and Investment Corporation of Maharashtra Ltd. and Anr., [1993]1SCR340 . It does not appear from the above two decisions of this Court nor from the decisions of the various High Courts brought to our notice, that in any one of them, the liability of the sick company dealt with therein itself arose, for the first time after the date of sanctioned scheme. At any rate, in none of those cases, a situation arose whereby the sick industrial unit was enabled to collect tax due to the Revenue from the customers after the 'sanctioned scheme' but the sick unit simply folded its hands and declined to pay it over to the Revenue, for which proceedings for recovery, had to be taken. The two decisions of this Court as also the decisions of High Courts brought to our notice are, therefore, distinguishable. They will not apply to a situation as has arisen in this case. We are, therefore, of the opinion that Section 22(1) should be read down or understood as contended by the Revenue. The decision to the contrary by the High Court is unreasonable and unsustainable. We set aside the judgment of the High Court and allow this appeal. There shall be no order as to cost. (Emphasis supplied)

8. In Sirmor Sudburg Auto Ltd. -vs- Kuldip Singh Lamba,

[1998] 91 Comp.Cas. 727, R.C. Lahoti, J., as the Learned Single

Judge of this Court then was, opined that to be entitled to a stay

of legal proceedings under Section 22 of the Act, a mere

pendency of the enquiry would not suffice; the claimed dues

must be reckoned or included in the sanctioned scheme. A suit

for eviction against a sick industrial company is not liable to be

stayed under Section 22(1) of the SICA. This decision has been

followed by the Division Bench of the Calcutta High Court in

Taulis Pharma Ltd. -vs- Bengal Immunity Ltd., [2002] 108

Comp.Cas. 237. Similar views have also been expressed in

Vibgyar Ink Chem (Pvt.) Ltd. -vs- Safe Pack Polymers Ltd.,

[1998] 93 Com.Cas. 407, which likewise is a decision of the

Division Bench of the Andhra Pradesh High Court which

enunciates that "an independent transaction de hors the scheme

obviously cannot thus be covered within the ambit of Section 22

of the 1985 Act".

9. Justice Lahoti's view has also been followed by a Single

Bench of the Calcutta High Court in Fort William Industries

Limited v. Usha Bentron Limited, [2002] 108 Comp. Cas. 176.

His Lordship, Dr. Mukundakam Sharma, J. has, in the Cement

Corporation of India -vs- Manohar Basin, 82 (1999) DLT 343

observed that since no documentary proof had been furnished to

disclose that any scheme stood sanctioned the so-called SICA

bar was not attracted. A Single Bench of the Bombay High Court

in Special Steels -vs- Jay Prestressed Products Ltd., [1991] 72

Comp.Cas. 277 has opined that the pivotal question in

connection with the current conundrum concerns the assets of

the Company and its functioning, and these would not be

jeopardised if a civil suit continues. In Hardip Singh -vs- Income

Tax Officer, Amritsar, [1979] 118 ITR 57 (SC) the winding-up

petition was allowed to continue and only when the third and

final stage of the dissolution of the Company came to be

reached, was the moratorium of Section 22 of the SICA

enforced.

10. Finally, we must consider the relevance of NGEF Limited -

vs- Chandra Developers (P) Ltd., (2005) 8 SCC 219, on which

reliance has been placed by learned counsel for the Appellant.

In the backdrop of several Judgments of the Supreme Court, it is

inconceivable for a Bench comprising two learned Judges to

charter a fresh and diametrically different view of Section 22 of

SICA to previous pronouncements. A careful consideration of

the Judgment discloses that their Lordships had countenanced a

completely contrary scenario. This is clear from the following

summation contained in paragraph 9 of the Judgment authored

by His Lordship S.B. Sinha, J:-

9. Mr. T.R. Andhiyarujina, the learned Senior Counsel appearing on behalf of the Appellants, in Civil Appeal Nos. 5199-5201 of 2004, would, inter alia, contend that the learned Company Judge and the Division Bench of

the High Court misdirected themselves in passing the impugned judgment and order insofar as they failed to take into consideration that BIFR retains the control over the assets of the company in terms of Sub-section (4) of Section 20 of SICA and, thus, it was BIFR alone which could issue a direction as regard sanction of sale of assets of the company in respect whereof the learned Company Judge had no jurisdiction. In any event, the learned Company Judge had no jurisdiction to issue any direction to the Company to execute a deed of sale which amounted to grant of a decree for specific performance of contract. In any view of the matter, the finding of the Company Judge to the effect that there existed a concluded contract between the First Respondent and the Company is wholly erroneous.

11. In the case in hand, the amount in respect of which the

adjudicatory process has been initiated has not been admitted

or reflected in the Scheme laid before BIFR. If any doubt

prevails, it would stand dispelled from a reading of Jay

Engineering Works Ltd. -vs- Industry Facilitation Council, AIR

2006 SC 3252 in which Justice S.B. Sinha expounded the law in

these pithy words:-

17. The said provision, thus, mandates that no proceeding inter alia for execution, distress or the like against any of the properties of the industrial company and no suit for recovery of money or for the enforcement of any security, shall lie or be proceeded

with further, except with the consent of the Board or as the case may be, the Appellate Authority. The said statutory injunction will operate when an inquiry had been initiated under Section 16 or a scheme referred to under Section 17 is under preparation and/or inter alia a sanctioned scheme is under implementation. It is not disputed before us that the amount awarded in favour of the Respondent by the council finds specific mention in the sanctioned scheme which is under implementation.

18. The award of the Council being an award, deemed to have been made under the provisions of the 1996 Act, indisputably is being executed before a Civil Court. Execution of an award, beyond any cavil of doubt, would attract the provisions of Section 22 of the 1985 Act. Whereas an adjudicatory process of making an award under the 1993 Act may not come within the purview of the 1985 Act but once an award made is sought to be executed, it shall come into play. Once the awarded amount has been included in the Scheme approved by the board, in our opinion, section 22 of 1985 Act would apply.

19. If the liabilities of the Appellant are covered by the Scheme framed under Section 22 of the 1985 Act, the High court was clearly in error in coming to the conclusion that the provisions thereof are not attracted only because the debt had been incurred after the Company was declared to be a sick one.

12. It is in this analysis that we have reached the conclusion

that the Appeal calls for dismissal with costs, which we quantify

at Rupees 25,000/- which are in addition to the sum of Rupees

10,000/- already imposed as costs by the learned Single Judge.

The Appeal is dismissed in these terms. Pending applications

are also dismissed.

EFA(OS) No.33/2008

13. As the learned Single Judge has taken note of the fact that

the proceedings before him were for the execution of a Decree

dated 19.1.2005 for a sum of Rupees 1,41,28,854/- along with

interest passed by this Court, the proceedings before him

partook of the nature of Execution. The Judgment Debtor had

objected to the maintainability of those proceedings, keeping in

view the sundry provisions of SICA. On behalf of the Decree

Holder/Appellant, Mr. J.C. Seth has contended that the

decreetal amount does not find mention in the Scheme

presented to BIFR and hence there is no legal impediment in

carrying the execution proceedings to their logical end. The

learned Single Judge has observed that the object of Section 22

of SICA is to keep legal proceedings in abeyance so that no

impediment may be caused to the revival of the sick company.

In doing so, the learned Single Judge relied on Real Value

Appliances Ltd. -vs- Canara Bank, (1998) 5 SCC 554, Rishabh

Agro Industries Ltd. -vs- P.N.B. Capital Services Ltd., (2000) 5

SCC 515 and Jai Engineering -vs- Industrial Facilitation Council,

(2006) 8 SCC 677. The argument raised on behalf of the

Appellant by its learned counsel, Mr. J.C. Seth is to the effect

that since the debt had not been mentioned in the Scheme, the

only inference possible was that the Judgment Debtor had

treated the Decree as standing out of or beyond those

proceedings. This begs the question whether it should not be

immune to execution proceedings.

14. The discussion contained above leads to the thesis that as

soon as a claim stands admitted, either because it has been

reflected in the Scheme, or because it stands favourably

adjudicated in a Court of law, the protection of Section 22 of

SICA would automatically have to be implemented. This is the

watershed between the present and the preceding case. Having

obtained a decree, further proceedings fall within the protective

mantle of Section 22 of SCIA as they cannot but be in the nature

of "execution, distress or the like". A plain reading of the

provision cannot but lead to any other conclusion. If there are

unique circumstances, which would justify the execution of the

decree, even in the face of the registration of a Scheme under

SICA, the proper recourse possible would be to obtain the

permission or consent of the Board or the Appellate Authority as

the case may be. Any other interpretation would completely

annihilate and defeat the intendment of Parliament.

15. The Appeal is without merit and is dismissed. Ordinarily

costs should follow but we desist from imposing any, primarily

because it may eventually transpire that the Appellant before us

has succeeded only in obtaining a paper decree.

( VIKRAMAJIT SEN ) JUDGE

( SUNIL GAUR ) JUDGE April 30, 2010 tp