National Small Industries ... vs Singer India Ltd. & Anr.
2010 Latest Caselaw 3980 Del

*           IN THE HIGH COURT OF DELHI AT NEW DELHI


                                                        Reserved on : 17.08 2010
%                                                  Date of decision : 30.08.2010


+                          WP (C) No. 7341 / 2009


NATIONAL SMALL INDUSTRIES CORPORATION LTD.
     ...    ...   ...    ...    ...    ...   ...    ...    ... PETITIONER
                        Through : Mr. T.K. Ganju, Senior Advocate with
                                  Mr. A.K. Thakur, Mr. R.K. Mishra,
                                  Mr. Anesh Paul & Mr. Rajiv Arora,
                                  Advocates.

                                     -VERSUS-

SINGER INDIA LTD. & ANR.
     ...    ...    ...     ...                  ...     ...       ...        ...      RESPONDENTS
                        Through : Ms. Maneesha Dhir with
                                  Ms. Geeta Sharma,
                                  Ms. Purti Marwah,
                                  Ms. Jayshree Shukla &
                                  Ms. Preeti Dalal, Advocates
                                  for Respondent No. 1.
                                  None for Respondent No. 2.

CORAM :
HON'BLE MR. JUSTICE SANJAY KISHAN KAUL
HON‟BLE MR. JUSTICE VALMIKI J. MEHTA

1.        Whether the Reporters of local papers
          may be allowed to see the judgment?                             YES

2.        To be referred to Reporter or not?                              YES

3.        Whether the judgment should be                                  YES
          reported in the Digest?


SANJAY KISHAN KAUL, J.

1. The petitioner is a Government Corporation duly

incorporated and registered under the provisions of the _____________________________________________________________________________________________

Companies Act, 1956 engaged in the business of

promotion and development of small-scale industries. The

petitioner was holding a stake of about 7.76% of the equity

capital of respondent No. 1 company which went into

financial difficulties resulting in proceedings under The Sick

Industrial Companies (Special Provision) Act, 1985 ( for

short, „the SICA‟ ). Respondent No. 1 was registered as a

sick company as its net worth stood eroded and

respondent No. 2 bank was appointed as the operating

agency. The background of the investment in share capital

of respondent No. 1 company by the petitioner has been

set out. Respondent No. 1 company is the successor-in-

interest of Indian Sewing Machine Company, Indian arm of

Singer, USA. In view of the provisions of the Foreign

Exchange Regulation Act, 1973 ( for short, „the FERA‟ ),

30% of the share capital of respondent No. 1 company was

offered to the petitioner at a cost of 60 lakhs. There have

been subsequently bonus and rights issue of respondent

No. 1. The bonus shares were enjoyed by the petitioner

while the rights shares were declined. The petitioner

claims that in view of respondent No. 1 company not

performing well, the petitioner diluted its holding leaving a

balance of about 7.76% of the total share / equity capital.

2. The petitioner claims that it had no knowledge of

respondent No. 1 company approaching the Board for

Industrial & Financial Reconstruction ( for short, „BIFR‟ ) till

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the representative of the petitioner collected the annual

report from the office of respondent No. 1 company on or

about 06.08.2008. It is only then the factum of respondent

No. 1 company being declared sick by the BIFR in terms of

an order dated 11.09.2006 came to light. The petitioner

also came to know that a draft rehabilitation scheme had

been prepared without consultation of the petitioner and

the same was sanctioned by the BIFR on 28.04.2008. The

effect of the scheme, insofar as the petitioner as a

shareholder was concerned, was that in view of the

subscribed and paid-up capital of respondent No. 1

company being reduced by 90% by reduction of the value

of the share to 1/- of face value of 10/-, there would be

dilution of the holding of the petitioner. Annual General

Meeting (AGM) of respondent No. 1 company was proposed

to be held on 19.08.2008, but it is claimed that no notice of

the same was received by the petitioner. The equity

shares were sought to be increased on preferential basis to

the promoter company and its associates which also

affected the rights of the petitioner as a shareholder.

3. The petitioner sought to challenge the aforesaid aspects in

W.P. (C) No. 5917/2008 before this Court, but the writ

petition was dismissed on 14.08.2008 on the ground of

there being an alternative remedy available to the

petitioner of preferring an appeal before the Appellate

Authority for Industrial & Financial Reconstruction ( for

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short, „AAIFR‟ ). The petitioner also sought to challenge

the notice dated 27.06.2008 of holding of the AGM on

19.08.2008 in CS (OS) No. 1697/2008 filed on the Original

Side of this Court. Initially, interim orders were granted in

favour of the petitioner company restraining respondent

No. 1 company from giving effect to the resolution to be

passed in the AGM, but on an appeal being filed by

respondent No. 1 company, the Division Bench of this

Court disposed off the appeal on 23.09.2008 in terms

whereof the interim orders were to continue to operate

only for two weeks to enable the petitioner to approach the

AAIFR. It is in these circumstances that the petitioner

preferred the appeal before the AAIFR against the order

dated 28.04.2008 passed by the BIFR in Case No.

119/2005. The appeal was registered as Appeal No.

203/2008. This appeal was dismissed on 20.02.2009,

which order is now sought to be assailed in the present writ

petition under Articles 226 and 227 of the Constitution.

4. A perusal of the impugned order of the AAIFR dated

20.02.2009 shows that only three aspects were urged by

the petitioner and those are also the aspects sought to be

urged consequently in the present writ petition as the

findings are against the petitioner on all the three aspects.

These three aspects are :-

(i) The BIFR has no power to provide for dilution of equity

under Section 18(2)(f) of the SICA without following

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the procedure prescribed under Section 81, 100 to 103

of the Companies Act.

(ii) The petitioner is a public financial institution within the

meaning of Section 19(1) of the SICA and, thus, there

can be no dilution of equity without consent of the

petitioner in view of Section 19(2) of the SICA.

(iii) The non-compliance by respondent No. 1 of Section

18(3)(a) of the SICA requiring the publication of the

draft scheme as per the directions of the BIFR to

enable the stakeholders to file their objections.

First Aspect :-

5. A perusal of the approved scheme shows that a multi-

pronged strategy for rehabilitation forms basis of the same

as reflected in para 9.2 as under :-

"(1) One Time Settlement (OTS) of the dues of FIs / Bank.

(2) Infusion of fresh funds by the promoters.

                (3) Relief   and     concessions    from  various
                     concerned parties.
                (4) Capital Restructuring."

6. The One Time Settlement (OTS) with the secured creditors

was negotiated with four banks and all the secured

creditors accepted the scheme. The scheme also

envisaged promoters‟ contribution of 8.35 crores for

funding of the scheme. By way of reduction of share

capital, the promoters were expected to sacrifice as

shareholders. The unsecured creditors were to accept 10%

of the principal outstanding dues as on 31.03.2007 as the

settlement amount. As per clause 11.9(ii)(a), the existing _____________________________________________________________________________________________

equity share capital of the company was to be reduced by

90% and then every ten equity shares of 1/- were to be

consolidated into one equity share of 10/- each fully paid-

up.

7. The controversy revolves around Section 18(2)(f) of the

SICA, which reads as under :-

"18. Preparation and sanction of schemes.

                        ...     ...     ...     ...     ...      ...     ...     ...

                (2)     The scheme referred to in sub-section (1)
                        may provide for any one or more of the
                        following, namely -
                        ...     ...     ...     ...     ...      ...     ...     ...

                (f)     the reduction of the interest or rights which

the shareholders have in the sick industrial company to such extent as the Board considers necessary in the interests of the reconstruction, revival or rehabilitation of the sick industrial company or for the maintenance of the business of the sick industrial company;"

8. Section 81 of the Companies Act deals with the further

issue of capital, while Sections 100 to 103 deal with the

special resolution for reduction of share capital. The SICA

has been enacted in public interest making special

provisions with a view to have remedial measures in

respect of a sick company. It is in view thereof that

primacy has been given to the provisions of the SICA in

terms of Section 32 of the said Act, which reads as under:-

"32. Effect of the Act on other laws.

(1) The provisions of this Act and of any rules or schemes made there under shall have effect notwithstanding anything inconsistent therewith contained in any other law except the provisions _____________________________________________________________________________________________

of the Foreign Exchange Regulation Act, 1973 (46 of 1973) and the Urban Land (Ceiling and Regulation) Act, 1976 (33 of 1976) for the time being in force or in the Memorandum or Articles of Association of an industrial company or in any other instrument having effect by virtue of any law other than this Act.

(2) Where there has been under any scheme under this Act an amalgamation of a sick industrial company with another company, the provisions under Section 72A of the Income-tax Act, 1961 (43 of 1961), shall, subject to the modifications that the power of the Central Government under that Section may be exercised by the Board without any recommendation by the specified authority referred to in that Section, apply in relation to such amalgamation as they apply in relation to the amalgamation of a company owning an industrial undertaking with another company."

Thus, the basis for rejection of the argument of the

petitioner in the impugned order is the power of the Board

(BIFR) conferred under Section 18(2)(f) of the SICA read

with Section 32 of the SICA.

9. We find no fault with the aforesaid reasoning. We are

fortified in our view by the observations made by a Division

Bench of this Court in Sarin International (P) Ltd. v.

Appellate Authority for Industrial and Financial

Reconstruction, (1997) 89 Comp. Cas. 842 (Delhi) = 1996

IV AD (Delhi) 646. A grievance was sought to be made in

that case about an approved scheme where dues of some

unsecured creditors had been waived wholly or partially

without their consent and the shareholding of the existing

shareholders had been written down by 90% and their

shares had been compulsorily transferred at 10% face

_____________________________________________________________________________________________

value to another entity. We may also note at this stage

itself that another aspect touched upon in that case was

that in the event of winding up, where the net worth stands

eroded, the secured creditors and shareholders practically

get nothing. The question of compensation for deprivation

of property would, thus, only arise if there was any real

property and since the net worth stands eroded, the

shareholders and creditors can be assumed to have no

property in respect of the investment.

10. The power being specifically conferred under Section

18(2)(f) of the SICA and the BIFR having wide and ample

powers for restructuring with the SICA playing an

overriding role in view of Section 32, the BIFR was within

its power to have directed the reduction of share capital

and issue of further capital at specified rates without going

through the process of the special resolution. We may also

note that the AGM was actually held where except the

petitioner, who is stated to be absent, the others were with

the scheme.

Second Aspect :-

11. The petitioner claims that its investment in the form of

share capital has to be appreciated in the context of how it

was made to invest in respondent No. 1 company which

was as per the directions of the Government of India in

view of the provisions of the FERA coming into force. It

was, thus, pleaded that there is no difference between the

_____________________________________________________________________________________________

provision of financial assistance to a sick company by way

of loan, advance, guarantee, sacrifice, relief or concession

by a financial institution and a sacrifice by the petitioner as

a shareholder. It is, thus, pleaded that the consent of the

petitioner was required under Section 19 of the SICA, which

was admittedly not obtained. The relevant provisions of

Section 19 read as under :-

"19. Rehabilitation by giving financial assistance.- (1) Where the scheme relates to preventive, ameliorative, remedial and other measures with respect to any sick industrial company, the scheme may provide for financial assistance by way of loans, advances or guarantees or reliefs or concessions or sacrifices from the Central Government, a State Government, any scheduled bank or other bank, a public financial institution or State level institution or any institution or other authority (any Government, bank, institution or other authority required by a scheme to provide for such financial assistance being hereafter in this section referred to as the person required by the scheme to provide financial assistance) to the sick industrial company.

(2) Every scheme referred to in sub-section (1) 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 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.

                      ...     ...     ...    ...     ...      ...     ...   ..."
                                                         (emphasis supplied)

12. We are unable to accept the aforesaid plea and once again

find no fault with the reasoning contained in the impugned

order. Merely because the petitioner is a Government

Company within the meaning of the Companies Act, which

_____________________________________________________________________________________________

has invested in the share capital of respondent No. 1

company, does not imply that the petitioner is covered

under Section 19(1) of the SICA. If this submission of the

petitioner was to be accepted, then equally an unsecured

creditor is making the so-called sacrifice as he would not

get the full amount of his dues nor interest. The provisions

of Section 19(1) of the SICA are specific as the financial

assistance has to be provided by way of loans, advances or

guarantees or reliefs or concessions or sacrifices. The

present case is one only of dilution of shareholding of the

petitioner in respondent No. 1 company.

13. Our attention has been drawn by learned counsel for

respondent No. 1 to a judgment dated 04.08.2008 of the

Division Bench of the High Court of Judicature at Madras in

W.A. No. 508 of 2008 titled „Tamil Nadu Industrial

Development Corporation Limited v. Board for Industrial

and Financial Reconstruction & Ors.‟. A similar plea was

sought to be advanced by the appellant therein, which was

a State level institution and had invested in the share

capital of the sick company. It was pleaded that lending of

loan and making financial investment by way of equity

cannot be treated differently and, thus, the consent of the

petitioner therein was required. The aspect of investment

of public money was also urged. The Division Bench held

that as per Section 19(2) of the SICA, the draft scheme has

to be circulated to a person for objection / consent, who is

_____________________________________________________________________________________________

required to provide financial assistance for revival of other

company. Such financial assistance has to be by way of

loans, advances or by way of guarantees or by way of

reliefs or concessions or sacrifices. Reduction of equity

capital does not fall in this category. The power of

reduction under Section 18(2)(f) of the SICA was also

simultaneously discussed.

14. In our considered view, the issue is no more res integra in

view of our judgment in Oman International Bank S.A.O.G.

v. Appellate Authority for Industrial and Financial

Reconstruction, 2010 (169) DLT 618 = 2010 (5) AD (Delhi)

566 wherein it was observed that in view of the provisions

of Section 19(1) read with Section 19(4), the BIFR has the

power to adopt such measures as may be necessary in

view of Section 18(3)(b) of the SICA and those measures

are not restricted to the ones prescribed under Section

18(1)(a) to Section 18(1)(e) of the SICA. Section 19(4) of

the SICA has been introduced by Act 54 of 2002 and the

objective is that secured creditors of not less than 3/4th

should not be able to prevent rehabilitation by the BIFR.

15. The petitioner, who was originally holding 30% of the share

capital, itself diluted it to 7.76% and is currently holding

1.31% of the equity capital. We may also note at this

stage that though the investment of the petitioner had

almost become worthless by erosion of the net worth of

respondent No. 1 company, we are informed that currently

_____________________________________________________________________________________________

the share of respondent No. 1 company is being traded in

the range of 28/- per share of face value of 10/-. This

result has been possible because of the rehabilitation

scheme with the co-operation of the secured creditors and

the funds infused by the promoters. New share certificates

after capital reduction already stands dispatched to all the

shareholders.

16. Learned senior counsel for the petitioner did seek to rely

upon the judgment of a Division Bench of this Court in

Mewar Sugar Mills Ltd. v. Chairman, Central Board of Direct

Taxes & Anr., 1998 VI AD (Delhi) 309, but that was in the

context of the relief from operation of Section 41 of the

Income Tax Act, 1961, which would be a sacrifice from the

Central Government and, thus, would have no application

to the facts of the present case.

17. We, thus, find no merit in the aforesaid plea.

Third Aspect :-

18. The third aspect emanates from a direction of the BIFR

requiring respondent No. 1 to publish the salient features

of the scheme in terms of Section 18(3)(a) of the SICA in

one leading newspaper and one State level vernacular

newspaper for information of the shareholders. The

admitted position is that the publication has taken place

only in Jammu & Kashmir Times. Thus, learned senior

counsel for the petitioner contends that the absence of the

publication about the aspect of reduction of share capital

_____________________________________________________________________________________________

as a salient feature of the scheme in the advertisement

coupled with the publication not being in conformity with

the directions of the BIFR passed in this behalf on

12.02.2008 negates the approval of the scheme.

19. In order to appreciate the controversy, we reproduce

Section 18(3)(a) as under :-

"18. Preparation and sanction of schemes.

... ... ... ... ... ... ... ...

(3)(a)The scheme prepared by the operating agency shall be examined by the Board and a copy of the scheme with modifications, if any, made by the Board shall be sent, in draft, to the sick industrial company and the operating agency and in the case of amalgamation, also to any other company concerned, and the Board shall publish or cause to be published the draft scheme in brief in such daily newspapers as the Board may consider necessary, for suggestions and objections, if any, within such period as the Board may specify."

20. Learned counsel for respondent No. 1 has urged that,

though there may be a technical defect, the fact remains

that the AGM was held where the petitioner as a

shareholder has had the full right to participate, but did not

even participate while all other shareholders were

overwhelmingly in favour of the scheme. It is also

submitted that the requirement of the aforesaid sub-

section is only publication of the draft scheme in brief in

such daily newspaper as the Board (BIFR) may consider

necessary and, thus, there is no mandate that it must be in

a national newspaper or in a vernacular newspaper, though

_____________________________________________________________________________________________

such a direction has undisputedly been passed by the BIFR

on 12.02.2008.

21. A reading of the impugned order shows that what has

weighed with the AAIFR is the non-participation of the

petitioner in the process of the draft scheme.

22. We find that undisputedly there has been a violation of the

direction passed by the BIFR on 12.02.2008. The

publication has taken place in terms of Section 18(3)(a) of

the SICA, but not as per the aforesaid direction. There is,

thus, a technical defect. The question is whether such a

technical defect should be made to now negate the

scheme when various parties have altered their position in

terms of the aspect of reduction of shareholding and the

consequential acts. In our considered view, the answer to

the same is in the negative.

23. We cannot lose sight of the fact that the petitioner is only a

shareholder. The petitioner could undoubtedly have put

forth its views in the AGM which provided the avenue for

the petitioner to put forth its views where the petitioner did

not participate. The shareholding of the petitioner was

only 7.76% and all the other shareholders have

overwhelmingly voted in favour of the draft scheme.

24. Learned senior counsel for the petitioner has brought to

our attention an order passed by the AAIFR in Appeal No.

226/2008 and other connected matters on 21.05.2010

where non-compliance of order dated 12.02.2008 of the

_____________________________________________________________________________________________

BIFR had been noticed, but considering the publication did

take place in Jammu & Kashmir Times, which is a State

level newspaper, an opinion was formed that the provisions

of Section 18(3)(a) of the SICA can be said to have been

complied with. However, since the principles of natural

justice were violated, an opportunity of hearing to the

appellants therein was provided, who are unsecured

creditors. Learned counsel submits that at least this

course of action should be followed.

25. In our considered view, this would be a fruitless exercise

and the mere completion of formality as if the plea of the

petitioner that dilution of share should not take place was

to be accepted, the complete restructuring process would

be affected. The company stands revived and various

parties have acted in pursuance to the scheme and shares

traded. It is not as if there are various options or

alternatives put forth by the petitioner, but the whole case

of the petitioner is predicated on the plea that its

shareholdings should not be diluted without its consent.

We have already held that the consent of the petitioner is

not required. Thus, no useful purpose would be served as

the issue of dilution of shareholding cannot be revisited

without affecting the whole scheme which in effect stands

implemented and the fruits of which are available and are

even being enjoyed by the petitioner in terms of a much

_____________________________________________________________________________________________

higher face value of the share at almost three times of the

face value as against less than 10% of the face value.

26. We are, thus, not inclined to re-open this chapter.

Conclusion :-

27. We are, thus, of the considered opinion that in view of the

aforesaid facts and circumstances of the case, the writ

petition is liable to be dismissed leaving the parties to bear

their own costs. Ordered accordingly.

SANJAY KISHAN KAUL, J.

August 30, 2010                                          VALMIKI J. MEHTA, J.
madan

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