Delhi High Court
International Finance ... vs Bihar Sponge & Iron Ltd. & Ors. on 31 May, 2010
Author: Valmiki J. Mehta
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ W.P.(C) No. 6915/07 & W.P.(C) No. 3277/08
Reserved on : 25th May, 2010
Pronounced on: 31st May, 2010
1. W.P.(C) No. 6915/07
INTERNATIONAL FINANCE CORPORATION,
WASHINGTON ...... Petitioner
Through: Mr. Rajiv Nayyar, Senior
Advocate with Ms. Nisha,
Advocate and Ms. Anushree
Tripathi, Advocate.
VERSUS
BIHAR SPONGE & IRON LTD. & ORS. ....Respondents
Through: Mr. Rajeev Sawhney, Senior
Advocate with Mr. Deepak
Khurana, Advocate and Mr. Rohan
Dheman, Advocate for the
respondent No.1.
Mr. Dinkar Singh, Advocate for
the IFCI.
Mr. Gopal Parsad, Advocate for
the respondent No.13.
2. W.P. (C) No. 3277/08
DEG-DEUTSCHE INVESTITIONS-UND
ENTWICKLUNGSGESELLSCHAFT MBH ......Petitioner
Through: Mr. Amit Chadha, Senior
Advocate with Mr. Ananya
Kumar, Advocate, Mr. Sidharth
Sethi, Advocate and Mr. Kunal
Sinha, Advocate.
VERSUS
BIHAR SPONGE & IRON LTD. & ORS. ....Respondents
Through: Mr. Rajeev Sawhney, Senior
Advocate with Mr. Deepak
Khurana, Advocate and Mr. Rohan
Dheman, Advocate for the
respondent No.1.
Mr. Dinkar Singh, Advocate for
the IFCI.
Mr. Gopal Parsad, Advocate for
the respondent No.13.
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 the Reporter or not? Yes
3. Whether the judgment should be reported in the Digest? Yes
% JUDGMENT
VALMIKI J. MEHTA, J
1. These writ petitions have been filed by the two secured creditors
who had given foreign currency loan (FCL) to the sick company M/s. Bihar
Sponge & Iron Ltd. (BSIL) impugning the order dated 21.6.2007 passed by the
Appellate Authority for Industrial and Financial Reconstruction (AAIFR)
which upheld the order dated 29.7.2004 passed by the Board for Industrial and
Financial Reconstruction (BIFR). Since the issues involved in both the cases
are same, both the writ petitions are being disposed of by this common
judgment.
2. BSIL became a sick company though it had achieved 100%
production because of the devaluation of rupee against the Deutsche Mark
(DM) whereby the company‟s liability rose from Rs.28.6 crores to Rs.73.67
crores. On 19.12.1996, BSIL was declared a sick industrial company and IFCI
was appointed as an Operating Agency(OA) to formulate the scheme for
revival of the company. After various proposals were discussed including
circulation of an earlier Draft Rehabilitation Scheme (DRS), ultimately an
amended DRS was circulated at the joint meeting of the creditors held on
15.2.2002. This DRS was accepted by a number of creditors but was opposed
by the Industrial Finance Corporation (IFC) which mooted an alternative
proposal of one time settlement. It was proposed by the IFC, the petitioner in
W.P.(C) No.6915/07 that a sum of Rs.135 crores be paid to the secured
creditors as follows:
"i) 65 crores to be paid upfront in cash by the promoters
including the Government of Jharkhand
ii) Balance Rs.70 crores to be paid over a period of 10
years carrying interest @ 8% P.A. On Rupee Term Loan
(RTL) and @ LIBOR on Foreign Currency Loan (FCL) loan
from company‟s internal accruals.
GOJ (Government of Jharkhand) was required to furnish the
guarantee for timely payment of balance Rs. 70 crores."
3. This alternative proposal put forth by IFC on 18.1.2002 with cut
off date as 30.9.2001 was discussed between the creditors and accepted by
them. There were further developments, discussions and proceedings before
BIFR as regards DRS. However, at the hearing held on 17.2.2003, BIFR
considering the DRS passed an order as follows:
"(i) GOJ would decide in three weeks whether they are agreeable
to extend the reliefs and concessions as provided in the DRS
including investment of Rs.50 crores in the company and
guaranteeing the repayment of the balance OTS dues to the
secured creditors.
However, in case GOJ is not agreeable to extend their support to
the DRS as circulated by BIFR vide order dated 27.11.2002 or no
agreed rehabilitation proposal is received from the private
promoters, the OA would issue advertisements in leading
newspapers within 2 weeks inviting offer for the
takeover/leasing/amalgamation/ merger for rehabilitation with or
without OTS of the dues of FIs and Banks...."
4. The Patna High Court in a writ petition filed by Bihar State
Industrial Development Corporation (BSIDC) on 2.9.2003 ordered the sick
company to deposit Rs.12 crores in a no lien account with the OA by
08.09.2003. The Hon‟ble High Court further directed that in the event the said
deposit is made within time, the OA will not proceed with the direction of BIFR
for issue of an advertisement for change of management.
5. A Special Leave Petition was filed by IFC in the Hon‟ble Supreme
Court challenging the Patna High Court order dated 2.9.2003 and seeking
transfer of the writ petitions preferred by the company and also by BSIDC.
The same was listed for hearing on 23.4.2004. After hearing the parties the
Hon‟ble Supreme Court observed as follows:
"The reasoning of the BIFR in the order dated 17.2.2003 cannot be
faulted. Sufficient opportunities appeared to have been given at
every stage to the private promoters and the Government of
Jharkhand to invest the amounts as proposed in the scheme of IFCI.
The order for advertisement may give a better deal to the secured
creditors to give a last chance to the private promoters and the
Government of Jharkhand to take advantage of the scheme framed
by IFCI instead allowing the appeal right away, we direct (emphasis
supplied);
(1)... the private promoters shall deposit an amount of
Rs.32.50 crores by 12.7.2004 with the IFCI.......
(2)....The State‟s offer to give Rs.32.50 crores under the IFCI
scheme is also hedged in by several conditions, namely, that the
assistance would be given under the provisions of the Jharkhand
Industries Rehabilitation Scheme 2003; the assistance would be
considered only when the BIFR approved the proposal after taking
consent of the financial institutions and the State Government
and only if the security would be given to the State in terms of the
guidelines prescribed by the Reserve Bank of India and
Nationalized Banks.
We are not prepared to impose any such conditions as
far as the State‟s participation in the scheme is concerned. The issue
of security in respect of the loan must be worked out between
the State and the promoters, if it so desires. It is being made clear
that the State‟s securities, if any, in the company‟s assets can only be
subject to the claims of the secured creditors who are already before
the BIFR...."
While approving BIFR‟s order dated 17.02.2003, the Hon‟ble Supreme
Court made certain modifications to the DRS, which had earlier been approved
by all the secured creditors.
6. On 12.7.2004, when the aforesaid appeal came up for hearing, the
Hon‟ble Supreme Court passed the following order:
"The deposit has been made by the State of Jharkhand of an amount
of Rs.32.50 crores with the operating agency, namely, I.F.C.I within
the time specified in the order dated 23rd April, 2004. This, therefore,
leaves two questions to be determined, one of the approval of the
draft scheme and the other is distribution of Rs.65 crores at present
being held by the IFCI. Both these questions should be left to the
Board of Industrial and Financial Reconstruction who will dispose of
the matter within a period of two weeks from date subject to the
parties communicating this order to the Board forthwith. Any
objection to the draft scheme which the parties may have, may be
taken before the BIFR.
As far as the second question is concerned the IFCI will in the
meanwhile and, if possible, within one week, distribute the amount of
Rs.65 crores amongst the secured creditors according to its
calculations. In the event there is any dispute as to the quantum
receivable by any secured creditor the matter may be taken up by such
secured creditor before the Board.
The application for impleadment is allowed.
The civil appeal is disposed of accordingly.
The cases which are transferred, are disposed of in terms of the order
dated 23.4.2004 read with the order passed today."
7. At the hearing subsequently held on 29.7.2004 before BIFR the
impugned order was passed in which inter alia it was observed by BIFR as
under:
".... The issue basically boiled down to whether the Government
Guarantee could be compensated by an interest charge of 1% or
3%. He, therefore, suggested that interest on FCL could be paid at
LIBOR+1%....The representative of the secured creditors agreed
with the OA‟s suggestion. The representative of the IFCI(OA)
further submitted that the amount of Rs.65 crores had been
distributed among the secured creditors on the basis of rupee value
of their principal outstanding dues and no cushion was available for
giving higher amounts. However, cushion of 5% had been built
into the scheme in respect of balance Rs.70 crores payable over the
next 7 years."
8. The aforesaid shows that BIFR on considering the submission
made by OA that increase of 3% interest on FCL would adversely affect the
liability of the company and Debt Coverage Service Ratio (DCSR) would go
below 1.33, which in turn will make the scheme non viable and duly
considering the submission made on behalf of IFC suggesting that the interest
on FCL should be payable at LIBOR +3% in lieu of non availability of
guarantee (which was to be furnished by the Government of Jharkhand) directed
that the instalments in respect of both Rupee Term Loans (RTL) and FCL
would be payable at quarterly intervals and the sick company would pay 1%
incremental interest to the secured creditors in lieu of Guarantee which was
supposed to be given by GOJ but not given. The BIFR also observed that the
rupee value of the foreign currency dues had been crystallized as on 30.09.2001
and since there was no cushion available in respect of the upfront payment made
in respect of the FCL, no additional amounts could be paid to the creditors. By
its order dated 29.07.2004 BIFR sanctioned the Draft Rehabilitation Scheme
with certain modifications in spite of the aforesaid objections of the writ
petitioners.
9. This order of BIFR was challenged by IFC by raising the two
following issues:
i) Denial of interest @ LIBOR+3% for the Foreign Currency
Lenders (FCL) by the BIFR was illegal as the DRS was wrongly
amended by BIFR without taking consent to the petitioners/secured
creditors and which consent was mandatory under Section 19 of Sick
Industrial Companies (Special Provisions) Act, 1985 (SICA)
ii) Denial of the liability of the company to make good the
shortfall/deferential amount on the upfront payment which was on
account of exchange rate fluctuation on the date of payment as against
the cut of date of 30.09.2001 was unjustified.
Similar were the objections of DEG before AAIFR, the other secured
creditor who has filed the W.P.(C) No.3277/08. It was contended by the writ
petitioners before AAIFR that despite the recording of the objections taken by
IFC and DEG, and the clear position where the FCL lenders had expressed their
consent to the scheme only subject to payment of LIBOR+3% interest and
payment of shortfall due to foreign exchange fluctuation, BIFR proceeded to
pass the impugned order and recorded at para 15 concluding that the additional
1% interest would be payable in lieu of the interest as originally provided for in
the scheme by all secured creditors and thereby approved the scheme providing
for LIBOR+1% for FCL as opposed to the agreed LIBOR+3% interest rate
demanded by the writ petitioners. It was argued that the sick company in the
SLP in the Supreme Court had filed an affidavit agreeing to pay LIBOR + 3%
which the company cannot back out of.
10. AAIFR, therefore, crystallized the first aspect which required its
decision in paragraph 30 of the impugned judgment which reads as under:
"30. The issue relevant for adjudicating the dispute according to
the appellants is whether BIFR can scale down a liability or dilute
any of the terms of sacrifices and financial assistance and compel
a secured creditor to consent to a scheme contrary to the
acceptable terms to such a creditor and (b)-whether it is open for
BIFR to substitute its own discretion judgment in place of the
secured creditor‟s business judgment."
11. Before this Court also the same arguments were raised as were
raised before BIFR and AAIFR. An additional issue has also been urged on
behalf of the respondent herein and which was that the order of BIFR dated
29.7.2004 was a consent order, therefore, appeal did not lie against the said
order to AAIFR.
12. AAIFR on the two issues held as under:
"41. On the first issue it is clear that in the event Government of
Jharkhand had furnished guarantee the payment of OTS dues of IFC
(W) and DEG would have been subject to payment of interest at
LIBOR; whereas BIFR had allowed interest at LIBOR+1% since the
guarantee of Government of Jharkhand was not forthcoming.
However, the financial interests of IFC(W) and DEG are not adversely
affected as a result of the scheme approved by BIFR.
42. On the second issue the submission made in writing and
suggestions/objections in respect of the DRS circulated in 2004 was
considered and overruled by BIFR in the hearing held on 29.7.2004,
when the impugned order was passed. In the absence of consent BIFR
has the power to adopt such other measures as may be deemed fit in the
interests of reviving the company."
13. So far as the issue that BIFR could not have amended the draft
scheme as was approved by the secured creditors by reducing the future interest
on payment of the balance amount of Rs.70 crores from LIBOR +3% to LIBOR
+1%, the issue is really one that whether consent of all the secured creditors is
necessary for approval of any modification to a DRS by BIFR i.e. without the
consent of the secured creditors under Section 19 of SICA can there not be
modifications to a DRS which was circulated and accepted by the secured
creditors. We have recently had an occasion to consider this aspect in W.P.(C)
No.8644/09 titled as Oman International Bank S.A.O.G. Vs. AAIFR decided
on 5.5.2010 and in which we have held that it is not mandatory to seek consent
of all the secured creditors for approval of a draft scheme and modifications can
be made thereto by BIFR as it thinks fit for revival of the sick company. We
have, therefore, approved what has been held by AAIFR in para 42 of the
impugned judgment reproduced above. Our reasoning in the case of Oman
International Bank S.A.O.G. Vs. AAIFR is contained in paras 7 to 11 and 13
of the said judgment and which read as under:
"7. The Statement of objects and reasons of SICA
may be referred to at this stage, and which reads as follows:
"Statement of objects and reasons The ill effects of
sickness in industrial companies such as loss of production, loss
of employment, loss of revenue to the Central and State
Governments and locking up of investible funds of banks and
financial institutions are of serious concern to the Government
and the society at large. The concern of the Government is
accentuated by the alarming increase in the incidence of sickness
in industrial companies. It has been recognized that in order to
fully utilize the productive industrial assets, afford maximum
protection of employment and optimize the use of the funds of
the banks and financial institutions, it would be imperative to
revive and rehabilitate the potentially viable sick industrial
companies as quickly as possible. It would also be equally
imperative to salvage the productive assets and realize the
amounts due to the banks and financial institutions, to the extent
possible, from the non-viable sick industrial companies through
liquidation of those companies.
It has been the experience that the existing institutional
arrangements and procedures for revival and rehabilitation of
potentially viable sick industrial companies are both inadequate
and time-consuming. A multiplicity of laws and agencies makes
the adoption of coordinated approach for dealing with sick
industrial companies difficult. A need has, therefore, been felt to
enact in public interest a legislation to provide for timely
determination by a body of experts of the preventive,
ameliorative, remedial and other measures that would need to be
adopted with respect to such companies and for enforcement of
the measures considered appropriate with utmost practicable
dispatch.
The salient features of the Bill are-
(i) application of the legislation to the industries specified
in the Final Schedule to the Industries (Development and
Regulation) Act, 1951, with the initial exception of the
scheduled industry relating to ships and other vessels drawn by
power, which may however be brought within the ambit of the
legislation in due course;
(ii) identification of sickness in an industrial company,
registered for not less than seven years, on the basis of the
symptomatic indices of cash losses for two consecutive financial
years and accumulated losses equaling or exceeding the net
worth of the company as at the end of the second financial year;
(iii) the onus of reporting sickness and impending sickness
at the stage of erosion of fifty per cent. or more of the net worth
of an industrial company is being laid on the Board of Directors
of such company; where the Central Government or the Reserve
Bank is satisfied that an industrial company has become sick, it
may make a reference to the Board, likewise if any State
Government, scheduled bank or public financial institution
having an interest in an industrial company is satisfied that the
industrial company has become sick, it may also make a
reference to the Board;
(iv) establishment of Board consisting of experts in various
relevant fields with powers to enquire into and determine the
incidence of sickness in industrial companies and devise suitable
remedial measures through appropriate schemes or other
proposals and for proper implementation thereof;
(v) constitution of an Appellate Authority consisting of
persons who are or have been Supreme Court Judges, senior
High Court Judges and Secretaries to the Government of India,
etc., for hearing appeals against the order of the Board."
(Emphasis added)
8. A reading of the aforesaid Statement of objects and
reasons shows that the effect of sickness in industrial companies
is of serious concern not only to the government but also to the
society at large. The objects and reasons further show that there
is a need to fully utilize the productive industrial assets and
afford maximum protection to employment and it is imperative
to revive and rehabilitate the potentially viable sick industrial
companies. When we read the aforesaid Statement of objects
and reasons alongwith Section 20 of the Act, it becomes clear
that winding up of a company is to be resorted to only as a last
eventuality and only when it becomes just and equitable to wind
up the sick industrial company. That the proposition as was very
vehemently canvassed on behalf of the petitioner has no legs to
stand upon becomes clear also from the expression "one or
more" as found in Section 18 of the Act. The expression „one or
more‟ includes „all‟ i.e. all measures including financial
concessions. This expression "one or more" indicates that more
than one eventuality can be adopted and acted upon by BIFR to
rehabilitate and revive a sick industrial company and not only
one eventuality of resorting to other sub sections of Section 18
except its sub section (1)(e) . Section 19(4) will have to be
harmoniously construed with the expression „one or more‟ as
found in Section 18 so as to further the object of the Act. There
cannot be a reading of the provisions of Section 19(1) and 19(4)
of the Act in the manner as is suggested by the learned senior
counsel for the petitioner further becomes abundantly clear when
we read Section 18(3)(b) of the Act alongwith the expression
"the Board may adopt such other measures" as found in Section
19(4). In our opinion, this expression "the Board may adopt
such other measures" cannot be restricted to only measures other
than those prescribed under Section 18(1)(a) and 18(1)(e) of the
Act. Section 18(3)(b) states categorically that the Board would
make modification to a scheme of revival and rehabilitation of a
company in case of any objection from a creditor, therefore, a
conjoint reading of Section 18(3)(b), Section 19(1) and Section
19(4) shows that the other measures which are talked of in
Section 19(4) would be the modification of a scheme in the light
of the objections of a secured creditor, however, the same cannot
mean that the objections can prevent the drawing up and
implementation of a sanctioned scheme by an obdurate minority
secured creditor. In fact, we must point out that a company
becomes sick only because its net worth is eroded and it is
unable to pay its creditors and when we talk of revival and
rehabilitation of sick company as a first step and measure
ordinarily and in a vast majority of cases, at the outset, BIFR has
necessarily to bring about a composition between the creditors
by bringing about reduction of their claims and dues of the sick
company towards the creditors by adopting a principle which
would treat the secured creditors fairly and equally, depending of
course on the facts and circumstances of each case.
9. There is yet another reason why we cannot accept the
arguments as urged on behalf of the petitioner that a single
creditor can prevent BIFR in bringing about a scheme which
envisages reduction in the dues payable by the sick company to
its secured creditors. This additional reason is the amendment
which has been brought about to SICA by Section 41 and
schedule of the Act 54 of 2002 which amended Section 15 of
SICA after promulgation of the Securitization and
Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002. As a result of this amendment, a third
proviso has been brought about in sub Section (1) of Section 15
that the secured creditors who represent not less than 3/4 th in the
value of the amount outstanding against financial assistance
disbursed to the sick company can bring about an abatement of
proceedings pending before BIFR. This proviso reads as under:
"Provided also that on or after the commencement of
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002, where a reference is
pending before the Board for Industrial and Financial
Reconstruction, such reference shall abate if the secured
creditors, representing not less than three-fourth in value of the
amount outstanding against financial assistance disbursed to the
borrower of such secured creditors, have taken any measures to
recover their secured debut under sub-section(4) of section 13 of
that Act."
A plain reading of this proviso added by the Act 54 of
2002 shows that the consent of at least 3/4 th of the secured
creditors is necessary for the proceedings before BIFR to abate.
This proviso further brings into focus the legislative intent that a
minority creditor cannot frustrate the proceedings before BIFR
for rehabilitation and revival of the sick industrial company. The
Legislature has thought it fit that at least 75% of the secured
creditors must join hands to bring about an abatement to the
proceedings before BIFR. If that be so, it cannot be understood
as to how one secured creditor can in fact bring about an
abatement of the proceedings before BIFR because giving of
financial concessions by reducing the dues payable by a sick
industrial company is always the heart and basic structure of any
scheme for revival and rehabilitation of a sick industrial
company. After all, if no financial concession in the form of
reduction of dues payable by a sick company to its creditors is
given, then, what will be the use of other measures under Section
18 such as change of management or sale/lease of assets of a
sick company and so on. None of these other measures would in
themselves help in rehabilitation and revival of the sick
industrial company and which measures could have been
adopted by the sick company without being a sick company
governed by SICA. It is for this reason that the Legislature has
advisedly and intentionally used the expression "one or more" as
found in Section 18, and which aspect we have already adverted
to above that the Board may take one or more measures i.e. it is
not confined only to one measure of refusing financial assistance
by means of concession to a sick industrial company. Revival of
a sick industrial company is a complex process involving
discussions with secured creditors, other creditors, labour and
other personnel employed with the company, dues of the revenue
authorities and so on. If such complex procedure can be
frustrated and set at naught by a single secured creditor, then,
what is the purpose and use of enactment of SICA.
10. That the Statement of objects and reasons of
SICA ought to be referred to for interpreting the provisions of
the Act is clear from various judgments of the Supreme Court
including the judgments reported as KSL and Industries Ltd.
Vs. M/s. Arihant Threads Ltd. & Ors. 2008 (9) JT 381: 2008
(12) SCR 702, Morgan Securities and Credit Pvt. Ltd. Vs. Modi
Rubber Ltd. AIR 2007 SC 683: 2006 (14) Scale 267 and M/s.
Rishabh Agro Industries Ltd. Vs. P.N.B. Capital Services
Limited AIR 2000 SC 1583: 2000 (5) SCC 515.
11. There are two other aspects which we must note
in support of the interpretation which we seek to give to Section
19(4) of the Act. The first aspect is that even when a company is
not sick and proceedings are resorted to by the company under
Section 391 to Section 394 of the Companies Act, 1956 to bring
about a composition and settlement with its creditors, it is the
majority of the secured creditors who do prevail, meaning
thereby minority secured creditors cannot frustrate a scheme
which is propounded by the majority of the secured creditors. If
a minority secured creditor cannot frustrate a scheme of
composition under Section 391 to Section 394 of the Companies
Act, 1956, there is no reason why a minority shareholder should
be able to frustrate the revival and rehabilitation of a sick
industrial company by refusing to accept a reduced amount and a
statutory settlement which is brought about by approval of a
rehabilitation scheme by BIFR as per the proposal of the
operating agency and arrived at after duly considering the
suggestions and objections of all the concerned stake holders
including the creditors under Section 18(3)(b) of the SICA.
SICA after all is for imposition of a valid statutory settlement
which forms part of a sanctioned scheme. The second aspect is
that by virtue of Section 529-A of the Companies Act, the dues
of the workers are to be treated as equal to the dues payable to a
secured creditor. Therefore, dues of even one of the workers can
be in a manner of speaking be said to be the dues claimed by a
secured creditor, but can it be contended that one worker can
frustrate a rehabilitation and revival scheme as proposed by
BIFR after duly taking into consideration the views, suggestions,
objections and contentions of the majority of the workmen?
Surely not. Therefore, in our opinion, a minority creditor or any
minority group cannot frustrate the majority by putting a spoke
in the wheel by objecting to the sanction of a rehabilitation and
revival scheme of a sick industrial company so as to cause the
frustration in the object of revival of a sick company.
Xxxxxxx
13. One last factor we must mention that the recent
commercial crisis arising in the western world from insolvencies
of transnational companies shows that the bedrock on which
SICA was enacted was indeed a sound one on the basis of the
needs of the society as a whole, though litigants have at times
misused the provisions of Act, and in view of the judgments of
the Supreme Court, both BIFR and AAIFR must play a proactive
role to ensure that this does not happen."
14. The first issue, therefore, that consent of all the secured creditors
including the writ petitioners was necessary before BIFR could have amended
the scheme, is not a contention which deserves acceptance and the same is
accordingly rejected.
15. Mr. Rajiv Nayyar and Mr. Amit S. Chadha, Learned Senior
Counsels, on behalf of the petitioners, sought to contend that there was a
conflict between the judgment passed by this Court in Oman International
Bank's case and an earlier judgment of a Division Bench of this Court in the
case of Kotak Mahindra Bank Ltd. Vs. A.A.I.F.R. and Ors., (2008) 144
Company Cases 588 (Delhi) and therefore it was argued that the issue whether
the consent of all the secured creditors is mandatory before approving of a draft
scheme ought to be referred to a larger bench for decision. The following
paragraph of the decision in the case of Kotak Mahindra Bank Ltd. was relied
upon and which reads as under:
"15. In the instant case, the fact situation is totally different from
that in the case of NGEF. Here, the sale of assets has been
directed by the AAIFR which was competent to do so. There is no
abdication or delegation in that regard in favour of the High
Court. The order passed by the AAIFR clearly records a decision
to sell the surplus assets. Even, Mr. Kaul did not find any fault
with that direction. It was, however, argued by learned Counsel
that so long as the proceedings under SICA are pending, the
company cannot be permitted to approach the High Court even for
purposes of a scheme of arrangement/compromise regarding the
debts payable to the secured creditors. The decision in NGEF's
case does not, in our opinion, go that far. It is confined to
examining whether the BIFR could give up its role and either
delegate its powers or abdicate in favor of the High Court the
exclusive power vested in the BIFR for disposal of the assets of
the company. The decision cannot be torn out of the above
context. The Supreme Court was not in the case of NGEF
examining whether a sick company can be permitted to approach
the High Court for a scheme of arrangement/compromise with the
secured creditors under Sections 391-392 of the Companies Act,
in a case where such an arrangement was not legally permissible
under Section 19(2) of the SICA which required the consent of all
the creditors. There may have been some merit in the contention
of Mr. Kaul if the AAIFR was permitting something to be done in
the High Court which was within its own competence, for in that
case, it could be argued that if the BIFR or AAIFR are themselves
competent to examine an issue or grant a relief, they should not
refer the parties to the High Court for any such determination
under any other enactment like the Companies Act. The fact of
the matter, however, is that a scheme of arrangement was not
possible under Section 19(3) of SICA unless all the secured
creditors consented to the same. The AAIFR noted that while a
overwhelming majority of the secured creditors were agreeable to
a settlement with the company by making sacrifices, the petitioner
Kotak Mahindra holding only 2% of the outstanding debt was not
ready to do so. This attitude of the petitioner frustrated any such
scheme being made effective under Section 19 of SICA. The only
other option then was a scheme under Sections 391-394 of the Act
which could be brought about even with the consent of the
secured creditors holding 75% of the outstanding debts. It is
manifest that the AAIFR considered it necessary to make a
reference to the High Court under the Companies Act as it was
not by itself competent to bring about a scheme of
settlement/compromise. There was, thereforee, no question of any
abdication nor was there any delegation by the AAIFR of its
functions to the High Court as was sought to be contended by Mr.
Kaul. The decision in NGEF's case does not, thereforee, advance
the case of the petitioner. So also the decision of the High Court
of Bombay in Ashok Organic Industries Ltd. v. Asset
Reconstruction Co. (India) Ltd. (ARCIL) relied upon by Mr. Kaul
does not lend any support to the case of the petitioner. The Court
was not, in that case, concerned with Section 22 of the Companies
Act nor has the court examined whether Section 22 of SICA could
be invoked by AAIFR to permit institution of proceedings under
Section 391-394 of the Companies Act in the fact situation in
which the said proceedings have been permitted in the instant
case."
16. We are unable to agree with the contention as raised by the learned
senior counsel for the writ petitioners that there is a conflict between the ratio of
the decision of this Court in Oman International Bank and the ratio of the
decision in the case of Kotak Mahindra Bank Ltd. The issue which arose in the
case of Kotak Mahindra Bank Ltd, was whether on refusal of consent by the
secured creditors, can BIFR acting under the Sick Industrial Company (Special
Provisions) Act, 1985 (SICA) refer the matter to the Company Court for
approval of a scheme for arrangement and composition under Sections 391 to
394 of the Companies Act, 1956. Answering this issue, it was held by the
Division Bench that the matter could be referred to the Company Court. The
ratio of the decision was based on the issues which have been crystallized in
that case for decision and which are found in paras 1 and 2 of the said decision
which read as under:
"1. The short question that falls for consideration in this writ
petition is whether the order passed by the Appellate
Authority for Industrial and Financial Reconstruction (for
short 'AAIFR') granting permission under Section 18(1)(e) of
Sick Industrial Companies (Special Provisions) Act, 1985
(for short 'SICA) to approach the appropriate High Court for
submitting a scheme of arrangement/compromise qua the
secured creditors of the company under Section 391 of the
Companies Act suffers from error of law or jurisdiction. The
petitioner, who claims to have secured in its favor the
assignment of a debt which the respondent-sick company
owed to M/s Fuji Bank Ltd alleges that the order passed by
the AAIFR granting permission to the respondent-company
suffers from an illegality inasmuch as SICA is a special
enactment no authority including the High Court exercising
powers under any other enactment can, during the pendency
of the proceedings under SICA, entertain or sanction any
scheme of arrangement or compromise. Before we examine
the merits of that contention, we may briefly set out the facts
giving rise to the controversy:
2. The respondent-company was declared sick by the Board
for Industrial and Financial Reconstruction in terms of an
order dated 20th April, 2006 passed in Case No. 395/2003.
The Board noted that the respondent-company was not in a
position to work out a scheme under Section 17(2) of the Act
on its own and that the provisions of Section 18 shall have to
be explored in public interest. The Board, accordingly,
appointed the IDBI as an Operating Agency (OA) with
directions to advertise for change of management keeping in
view the guidelines given in the order. The Board noted that
all the secured creditors had decided not to support the
present management thereby necessitating a change. The
following passage appearing in the order passed by the BIFR
makes this position clear.
The Bench observed at that stage that the company in its
letter dated 18.4.06 had submitted to BIFR that they were
quite willing to give up control of JandN to ensure JandN's
future. Moreover, all secured creditors had unanimously
decided not to support the present management"
17. It is, therefore, quite clear that in the case of Kotak Mahindra
Bank Ltd. it was not decided whether refusal of a secured creditor to a draft
scheme would mean that a draft scheme could not be passed without the consent
of all the secured creditors. In fact, the judgment proceeded on the basis that
there is a refusal of the secured creditors to the DRS and whereafter the issue
called upon for decision was whether or not the matter could be referred to the
Company Court, although SICA is a subsequent and special Legislation than the
Companies Act, 1956. The ratio in the decision of Kotak Mahindra Bank
Ltd.(supra) is not a ratio for the proposition that what are the options available
to BIFR if the secured creditors refuse consent. There is no ratio in the said
decision as regards whether BIFR is shackled and necessarily bound to refuse
the approval of the draft scheme merely because one or more secured creditors
oppose the DRS. The ratio of a judgment has to be seen in the context of the
facts of the case and the language of the decision of a Court of law is not to be
read as that of a statute. This has been held by the Constitution Bench of the
Supreme Court in the case of Padma Sundra Rao Vs. State of Tamil Nadu
2002(3) SCC 533 and in which it has been held as under:
"9. Courts should not place reliance on decisions without
discussing as to how the factual situation fits in with the fact
situation of the decision on which reliance is placed. There is
always peril in treating the words of a speech or judgment as
though they are words in a legislative enactment, and it is to be
remembered that judicial utterances are made in the setting of
the facts of a particular case, said Lord Morris in British
Railways Board v. Herrington 9. Circumstantial flexibility,
one additional or different fact may make a world of difference
between conclusions in two cases."
(underlining added)
18. We may also note that the ratio of the decision in the case of Kotak
Mahindra Bank Ltd. stands overruled by the Supreme Court in the decision
reported as Tata Motors Ltd. Vs. Pharmaceutical Products of India Ltd.
2008(7) SCC 619, and in which decision, it has been held that the provisions of
SICA will prevail over the provisions of the Companies Act inasmuch as the
SICA is a special and subsequent Legislation. It was held in the case of Tata
Motors Ltd that once the matter is before BIFR/AAIFR, then, it is not
permissible to refer the matter to a Company Court under Sections 391 to 394
of the Companies Act. We, therefore, reject the contention that the decision in
the case of Kotak Mahindra Bank lays down the ratio that BIFR cannot modify
a DRS approved by the secured creditors without the consent of the secured
creditors.
19. The second issue which has been argued on behalf of the writ
petitioners is that the scheme provided for the cut off date for payment as 30th
September, 2001 and since the DRS was only approved vide order dated
29.7.2004, the authorities below erred in refusing to grant additional payment
on account of depreciation in the value of the rupee from 2001 to 2004. The
contention is that besides the payment of Rs.65 crores which was to be made as
upfront payment as part of total payment of Rs.135 crores to the secured
creditors, there should be an additional payment towards the foreign exchange
rate fluctuation. It is contended that failure of the authorities below to hold in
favour of the petitioners on this aspect should invite the interference of this
Court under Article 226 of the Constitution of India. It was further contended
that the secured creditors in the joint meeting dated 19.8.2002 before the OA
had specifically raised this issue.
20. In reply, Mr. Rajeev Sawhney, Learned Senior Advocate on behalf
of the respondent, invited our attention to the different paras of the draft scheme
as also the order of the Supreme Court dated 23.4.2004 in Civil Appeal
No.2787/04 titled as International Financial Corporation Vs. Bihar State
Industrial Development Corporation and the subsequent order dated 12.7.2004
therein. By so referring it was contended that in none of these orders before the
Supreme Court or in the DRS there is any reference to the payment of Rs.65
crores as a nebulous figure which is subject to foreign exchange fluctuation. In
fact, it is contended that the order of the Supreme Court of July, 2004 is in clear
proximity to the impugned order of BIFR dated 29.7.2004 and in the order of
the Supreme Court, reference is to a specific figure viz. of Rs.65 crores, and
hence it is not permissible to urge that foreign exchange fluctuation should be
paid for the period from 2001 to 2004.
21. We agree with the contention as raised by the learned senior
counsel for the respondent that writ petitioners though at one point of time may
have sought a higher payment on the ground of foreign exchange fluctuation,
they clearly had given up this issue at a subsequent stage in the proceedings
before the Supreme Court. The orders dated 23.4.2004 and 12.7.2004 of the
Supreme Court refer to a crystallized/final/frozen figure of payment of Rs.65
crores without any linkage to the foreign exchange fluctuation. We have
already reproduced in the earlier portion of this judgment, the order of the
Supreme Court dated 12.7.2004 which clearly refers to the payment of a freezed
amount of Rs.65 crores. Further, we are unable to agree with the arguments of
the learned senior counsel for DEG that para 8.6(vii) of the DRS envisages the
providing of a cushion for foreign exchange fluctuation. A reference to this
paragraph would show that the same only provided for short fall arising out of
the delayed implementation of the schedule fixed in the sanctioned scheme or
for any other such reason after the sanctioning of the scheme and not for issues
prior to the sanctioning of the scheme. BIFR was justified in concluding in para
15 of its judgment that there was no cushion available in respect of upfront
payment of 65 crores and hence no additional amount could be paid as urged on
behalf of the respondent.
22. The last issue which calls for our decision is the issue which was
urged on behalf of the respondent that no appeal lay before the AAIFR because
the order dated 29.7.2004 of BIFR was a consent order. This argument is
predicated on the basis of para 9 of the judgment of BIFR and which reads as
under:
"9. Shri Singh on behalf of IFCI (OA) submitted that FCL
tenders accounted for 50% of the OTS and increase of 3% interest
on FCL would adversely affect the liability of the company and
DSCR would go below 1.33. The issue basically boiled down to
whether the Govt. guarantee could be compensated by an interest
charge of 1% or 3%. He, therefore, suggested that interest on FCL
could be paid at LIBOR + 1% and all the secured creditors could
retain the right to accelerate the repayment schedule if the cash
flow of the company so warrants. The representatives of the
secured creditors agreed with the OA‟s suggestion. The
representative of IFCI (OA) further submitted that the amount of
Rs.65 crores had been distributed among the secured creditors on
the basis of the Rupee Value of their principal outstanding dues and
no cushion was available for giving higher amounts. However, a
cushion of 5% had been built into the scheme in respect of balance
Rs.70 crores payable over the next 7 years."
23. Mr. Sawhney also drew our attention to paragraph 38 of the
impugned order of AAIFR wherein in sub para 4 of the paragraph, this specific
contention was raised but which argument/contention has not been decided by
the AAIFR. We feel Mr. Sawhney is right and that this is an additional and
independent reason why we cannot accept the contention as now raised by the
writ petitioners to the judgment dated 29.7.2004 passed by BIFR. This
paragraph shows that all the secured creditors including the writ petitioners had
given their consent. Obviously, after giving the consent, there must have been a
rethink on behalf of the petitioners and it is for which reason that subsequently
IFC had given its written submissions before BIFR that it was in fact opposing
the grant of interest @ LIBOR + 1% instead of LIBOR +3%. The other writ
petitioner i.e. DEG raised this ground only in the appeal before the AAIFR for
the first time. On this aspect, it would be profitable to refer to the observations
of the Supreme Court in the case of State of Maharashtra v. Ramdas Shrinivas
Nayak, (1982) 2 SCC 463, wherein the Supreme Court has observed as under:
"4. When we drew the attention of the learned Attorney-General to
the concession made before the High Court, Shri A.K. Sen, who
appeared for the State of Maharashtra before the High Court and led
the arguments for the respondents there and who appeared for Shri
Antulay before us intervened and protested that he never made any
such concession and invited us to peruse the written submissions
made by him in the High Court. We are afraid that we cannot launch
into an enquiry as to what transpired in the High Court. It is simply
not done. Public policy bars us. Judicial decorum restrains us. Matters
of judicial record are unquestionable. They are not open to doubt.
Judges cannot be dragged into the arena. "Judgments cannot be
treated as mere counters in the game of litigation." We are bound to
accept the statement of the Judges recorded in their judgment, as to
what transpired in court. We cannot allow the statement of the Judges
to be contradicted by statements at the Bar or by affidavit and other
evidence. If the Judges say in their judgment that something was
done, said or admitted before them, that has to be the last word on the
subject. The principle is well-settled that statements of fact as to what
transpired at the hearing, recorded in the judgment of the court, are
conclusive of the facts so stated and no one can contradict such
statements by affidavit or other evidence. If a party thinks that the
happenings in court have been wrongly recorded in a judgment, it is
incumbent upon the party, while the matter is still fresh in the minds
of the Judges, to call the attention of the very Judges who have made
the record to the fact that the statement made with regard to his
conduct was a statement that had been made in error. That is the only
way to have the record corrected. If no such step is taken, the matter
must necessarily end there. Of course a party may resile and an
appellate court may permit him in rare and appropriate cases to resile
from a concession on the ground that the concession was made on a
wrong appreciation of the law and had led to gross injustice; but, he
may not call in question the very fact of making the concession as
recorded in the judgment.
5. In R v. Mellor Martin, B. was reported to have said:
"We must consider the statement of the learned Judge as absolute
verity and we ought to take his statement precisely as a record and act
on it in the same manner as on a record of Court which of itself
implies an absolute verity."
6. In King-Emperor v. Barendra Kumar Ghose Page, J. said:
"... these proceedings emphasise the importance of rigidly
maintaining the rule that a statement by a learned Judge as to what
took place during the course of a trial before him is final and decisive
: It is not to be criticized or circumvented; much less is it to be
exposed to animadversion."
7. In Sarat Chandra Maiti v. Bibhabati Debi Sir Asutosh Mookerjee
explained what had to be done:
"... It is plain that in cases of this character where a litigant feels
aggrieved by the statement in a judgment that an admission has been
made, the most convenient and satisfactory course to follow,
wherever practicable, is to apply to the Judge without delay and ask
for rectification or review of the judgment..."
8. So the Judges‟ record is conclusive. Neither lawyer nor litigant
may claim to contradict it, except before the Judge himself, but
nowhere else."
24. The aforesaid observations, therefore, make it clear that it was
mandatory for the writ petitioners to approach BIFR immediately after passing
of the judgment on 29.7.2004 that they had never given such a concession and
the statement of fact recorded in the judgment is wrong. Admittedly, no such
application was made. The matter, therefore, must rest there and in our opinion,
in view of the decision of the Supreme Court in the case of Ramdas Shrinivas
Nayak (supra) it is not permissible for the writ petitioners to contend that they
did not given their consent to the draft scheme as stated in para 9 of the
judgment of BIFR. The decision of the Supreme Court in Ramdas Shrinivas
Nayak (supra) case has been followed in various judgments thereafter and some
of these judgments are Ramvir Singh Vs. Union of India 2009 (3) SCC 97,
Food Corporation of India Vs. Bhanu Lodh 2005(3) SCC 618, Commissioner
of Customs Vs. Bureau Veritas 2005 (3) SCC 265 and Commissioner of
Endowments Vs. Vittal Rao 2005(4) SCC 120.
25. In any case, we are satisfied that there is no financial repercussion
or prejudice to the writ petitioners merely by giving the interest on future
payment at LIBOR +1% because the issue argued by the petitioners was only of
their risk assessment and not that of lesser payment. Admittedly, the writ
petitioners are getting a higher rate of interest than they would have got if the
government of Jharkhand had given the sovereign guarantee and in which latter
case they would only have got the LIBOR rate. There is therefore no financial
loss to the writ petitioners and so held by AAIFR in para 41 of the impugned
judgment. Further, in exercise of our jurisdiction under Article 226 of the
Constitution of India, we would not like to interfere with the two concurrent
decisions of the BIFR and AAIFR which are specialized bodies dealing with
these issues. In fact, it is for this purpose, we put it to the learned senior counsel
for the petitioners that if we substitute the rate of interest of LIBOR +1% to
LIBOR +1.5% or LIBOR +2% or LIBOR +3%, then how will our judgment and
estimation be better than the authorities below, who had acted upon the advice
of the OA. To this direct query, there was obviously no convincing answer.
We, therefore, feel that there is no illegality committed by both BIFR and
AAIFR in granting interest @ LIBOR + 1% in view of the submission of the
OA that increase of 3% interest on the foreign currency would affect the
liability of the company and the Debt Servicing Ratio would go below 1.33.
26. In view of the above, we find no force in the writ petitions which
are therefore dismissed leaving the parties to bear their own costs.
VALMIKI J. MEHTA, J.
MAY 31, 2010 SANJAY KISHAN KAUL, J.
Ne
