M/S. Lords Chloro Alkali Limited vs M/S. Bharat Heavy Electricals ...
2011 Latest Caselaw 2838 Del

*          IN THE HIGH COURT OF DELHI AT NEW DELHI

                                                               Reserved on: 21.04.2011
%                                                          Date of decision: 27.05.2011

+                               WP (C) No.8271 of 2010


M/s. LORDS CHLORO ALKALI LIMITED         ...PETITIONER
                    Through:  Ms. Purti Marwaha, Ms. Jayashree
                              Shukla & Ms. Varsha Banerjee,
                              Advocates.


                                          Versus


M/s. BHARAT HEAVY ELECTRICALS
LIMITED & ANR.                           ...RESPONDENTS
                    Through: Mr. Bhaskar P. Gupta, Sr. Advocate
                             with Mr. A.K. Roy, Advocate for
                             Respondent No.1.

                                                Respondent No.2 is a proforma party.

CORAM:
HON'BLE MR. JUSTICE SANJAY KISHAN KAUL
HON‟BLE MR. JUSTICE RAJIV SHAKDHER

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 present writ petition raises the following question of law:

"Whether a Public Sector Enterprise/Undertaking (for short „PSU‟) having dues outstanding in respect of a commercial transaction from a sick company within the meaning of The Sick Industrial Companies (Special Provisions) Act, 1985 (hereinafter referred to as „the SICA‟) falls within the definition of "other authority" for purposes of Section 19(1) of the SICA and is entitled to the benefit of sub-section (2) of Section 19 of the SICA of circulation of the scheme and entitlement to obtain its consent?"

_____________________________________________________________________________________________

2. Respondent No.1 Company supplied one unit of 12KA, 360V DC 6

Pulse Tyristor Converter System to the petitioner Company against a

purchase order dated 10.4.1996 for a plant at Alwar. Only some part

payments were made when the net worth of the petitioner Company was

wiped out and, thus, proceedings were initiated by the petitioner

Company under the SICA for being declared as a sick company. These

proceedings resulted in examination of a scheme for revival of the

petitioner Company and the final approved scheme in terms of the order

dated 30.11.2006 of the BIFR envisaged settlement of dues of secured

and unsecured creditors at 26.50 per cent and 10 per cent of the

principal amount respectively.

3. It is the case of respondent No.1 Company that it did not come to know

of these proceedings, and it is only after about two (2) years when an

appeal was filed before the AAIFR (aggrieved by the fact that

respondent No.1 Company was being treated under the head of

„unsecured creditors‟, which would entitle it only to 10 per cent of the

principal amount) did it become aware of the said proceedings. It is the

case of respondent No.1 Company that the said Company is a Central

PSU and has to be treated as "State" within the meaning of Article 12 of

the Constitution of India and would, thus, be covered within the

meaning of "other authority" under Section 19(1) of the SICA which

would entitle it to a prior notice under Section 19(2) of the SICA.

4. In order to appreciate the controversy, the relevant provisions are

reproduced 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 relief's 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 further period, not exceeding sixty days, as may be allowed by the Board, and if no consent is received within such period or further period, it shall be deemed that consent has been given."

5. The plea of respondent No.1 Company found favour with the AAIFR in

terms of the impugned order dated 12.10.2010 on the premise that the

term "other authority" used in Section 19 (1) of the SICA will take its

colour from Article 12 of the Constitution of India. Respondent No.1

being a PSU was, thus, covered within the meaning of "other authority"

under Article 12 of the Constitution of India and consequently under

Section 19 (1) of the SICA.

6. Another fact taken note of by the AAIFR is that a subsequent order was

passed by the BIFR on 26.3.2010 in terms whereof the petitioner

Company was discharged from the purview of SICA/BIFR as its net

worth had become positive as on 31.3.2009 but simultaneously

directions were issued by the same order that the unimplemented

provisions of the sanctioned scheme, if any, should be implemented by

the concerned agencies and their implementation would be monitored

by the petitioner. The final directions, as pointed out by learned senior

counsel for respondent No.1, are, however, limited in their scope as the

scheme is not sought to be reopened, the provisions of which are to

remain unchanged. The only change in the sanctioned scheme that may

need to be effected would be on the basis of the decision of the BIFR _____________________________________________________________________________________________

taken after notice to respondent No.1 and considering the response of

respondent No.1 in respect of its claims.

7. We have had the benefit of submissions of both the learned counsels for

the parties. The counsels have submitted before us that the exact

proposition of law as framed above is an unexplored terrain as there is

no direct pronouncement of the High Court or the Supreme Court in this

behalf though some judgements were referred to which may have

indirectly commented on the aspect in issue. It is also the common

cause of the parties that the AAIFR actually did not appreciate the

purport of the submissions and the correct question raised before it as

the issue was not one of applying the principles of Article 12 of the

Constitution of India to Section 19 of the SICA but the question to be

examined is as framed by us aforesaid.

8. The aforesaid being the position, we considered it appropriate to first to

hear the submissions of the learned senior counsel for respondent No.1

as to his plea that on a reading of Section 19 of the SICA, respondent

No.1 would be covered within the definition of "other authority".

Learned counsel fairly submitted before us that he was conscious of the

fact that the scope within the meaning of Article 12 of the Constitution

of India would be limited and the scope within Article 226 of the

Constitution of India would be wider in this behalf. It was, thus,

submitted that the question was not one as to whether the transaction in

question was in furtherance of any public duty but on the interpretation

of Section 19 (1) of the SICA.

9. Learned senior counsel for respondent No.1 submitted that Section 19

(1) of the SICA envisages a scheme for rehabilitation of the sick

company to be provided with financial assistance or sacrifices from: _____________________________________________________________________________________________

a. Central Government, State Government,

b. Any scheduled bank or other bank,

c. A public financial institution or State level institution or any

institution, or

d. Other authority.

10. Learned counsel also referred to the provisions of Section 3(1)(p) of the

SICA, which read as under:

"3. Definitions.

(1) In this Act, unless the context. otherwise requires, -

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

(p) "State level institution" means any of the following institutions, namely :-

(i) State Financial Corporations established under section 3 or section 3A and institutions notified under section 46 of the State Financial Corporations Act 1951 (63 of 1951);

(ii) State Industrial Development Corporations registered under the Companies Act, 1956 (1 of 1956);

(iii) such other institutions, being companies and not being public financial institutions, engaged in the development or financing of industrial undertakings, as the Central Government may, by notification, specify :

Provided that no institution shall be so specified unless not less than fifty-one per cent of the paid-up share capital thereof is held by any State Government or Governments or by any institution or institutions mentioned in sub-clauses (i) and (ii) or partly by one or more public financial institutions or institutions mentioned in sub-clauses (i) and (ii) and partly by one or more State Governments."

11. It was, thus, submitted that while the expression „State level institution‟

used in Section 19 (1) of the SICA had been clearly defined, and the

expression „or any institution‟ must, thus, take colour from it, the

expression „other authority‟ has no similarity with the expression used

in Section 3 (1) (p) of the SICA.

12. All these entities aforesaid are collectively described as „the person

required by the scheme to provide financial assistance‟. (In order to _____________________________________________________________________________________________

indicate that the use of the phraseology „person‟ in other parts of

Section 19 of the SICA would include all these entities). Section 19 (1)

of the SICA makes no distinction between a secured and an unsecured

creditor. It gives certain special rights to a category of institutions as set

out therein irrespective of the fact that they have advanced any secured

or unsecured loans or carried out any other transaction.

13. Learned counsel submits that this Section is required to be broken into

four parts mentioned aforesaid. The expression "other authorities"

would have to have a reference to an entity other than an entity

mentioned in (a), (b) & (c) above and cannot stand alone. The

expression "other authority", it was submitted, will have to take colour

(a), i.e., the Central Government or State Government, as it does not fit

into the scheme of (b) or (c). It is in that context that the submission

was advanced that the expression "other authority" under Section 19(1)

will have the same meaning as in Article 12 of the Constitution of India.

The test whether a person or authority is discharging a public duty was

stated to be relevant in the context of maintainability of a remedy under

Article 226 of the Constitution of India but was not relevant in the

context of the meaning to be given to the expression "other authority"

and respondent No.1 being a creditor of a large amount of public money

was, thus, an "other authority" for purposes of Section 19 (1) of the

SICA and thus entitled to notice under Section 19 (2) of the SICA.

14. Learned counsel referred to the observations of the Constitution Bench

of the Supreme Court in Pradeep Kumar Biswas Vs. Indian Institute of

Chemical Biology & Ors. (2002) 5 SCC 111 to emphasise the expansion

of the functions of the Government in a welfare State resulting in

forging of a new instrumentality or administrative device for handling _____________________________________________________________________________________________

these new problems which resulted in creation of public corporations as

observed in Sukhdev Singh Vs. Bhagatram Sardar Singh Raghuvanshi

(1975) 1 SCC 421. Thus, it was held that neither the form of the

corporation, nor its ostensible autonomy would take away from its

character as „State‟ and its constitutional accountability under Part III

vis-à-vis the individual. In para 40 it was observed as under:

"40. The picture that ultimately emerges is that the tests formulated in Ajay Hasia Vs. Khalid Mujib Sehravardi (1981) 1 SCC 722 are not a rigid set of principles so that if a body falls within any one of them it must, ex hypothesi, be considered to be a State within the meaning of Article 12. The question in each case would be whether in the light of the cumulative facts as established, the body is financially, functionally and administratively dominated by or under the control of the Government. Such control must be particular to the body in question and must be pervasive. If this is found then the body is a State within Article 12. On the other hand, when the control is merely regulatory whether under statute or otherwise, it would not serve to make the body a State."

15. We may note at this stage itself that the emphasis is on an accountability

of such a State authority to rights conferred in Part III of the

Constitution of India.

16. Learned counsel for the petitioner, on the other hand, canvassed before

us that respondent No.1 Company despite being a Government

Company was not covered within "other authority" in Section 19 (1) of

the SICA as it had entered into a mere commercial transaction in

pursuance to a purchase order. There were other companies sailing in

the same boat. A transaction which is purely commercial in nature

without any public function or duty attached to it does not entitle

respondent No.1 Company to interfere into the revival scheme of a sick

industrial company merely on the ground that it is a Government

Company and thus while entering into such a commercial transaction a

Government Company cannot seek a better dispensation by virtue of _____________________________________________________________________________________________

being a PSU. Learned counsel sought to draw strength from the

observations made in WP (C) No.7341/2009 titled National Small

Industries Corporation Limited Vs. Singer India Limited & Anr. decided

on 30.8.2010 (reported in 2010 (103) SEBI & Corporate Law 385

Delhi), which is a judgement of the Division Bench of this Court. It

could, however, not be disputed that the issue which was adjudicated

upon in that case is slightly different. A PSU had invested money in the

sick company in the form of share capital and it was held that such

investment could not be said to be a financial assistance to a sick

company by way of loan, advance, guarantee, sacrifice, relief or

concession by a financial institution. Such a PSU which invests in the

share capital would not come within the meaning of Section 19 (1) of

the SICA. The case being one of dilution of shareholding of the

petitioner therein in the sick company was held not to come within the

purview of Section 19 (1) of the SICA.

17. Learned counsel for the petitioner also referred to the judgement of the

Supreme Court in Life Insurance Corporation of India Vs. Escorts

Limited & Ors. (1986) 1 SCC 264 wherein it was observed in para 102

as under:

"102. For example, if the action of the State is political or sovereign in character, the court will keep away from it. The court will not debate academic matters or concern itself with the intricacies of trade and commerce. If the action of the State is related to contractual obligations or obligations arising out of the tort, the court may not ordinarily examine it unless the action has some public law character attached to it. Broadly speaking, the court will examine actions of State if they pertain to the public law domain and refrain from examining them if they pertain to the private law field. The difficulty will lie in demarcating the frontier between the public law domain and the private law field. It is impossible to draw the line with precision and we do not want to attempt it. The question must be decided in each case with reference to the particular action, the activity in which the State or the instrumentality of the State is engaged _____________________________________________________________________________________________

when performing the action, the public law or private law character of the action and a host of other relevant circumstances. When the State or an instrumentality of the State ventures into the corporate world and purchases the shares of a company, it assumes to itself the ordinary role of a shareholder, and dons the robes of a shareholder, with all the rights available to such a shareholder. There is no reason why the State as a shareholder should be expected to state its reasons when it seeks to change the management, by a resolution of the Company like any other shareholder."

(emphasis supplied)

18. Learned counsel submitted that undisputedly respondent No.1 is a

creditor of the petitioner Company having a claim of Rs.73.49 lakh. As

to how such a creditor is to be treated has to take its colour from Section

18 (3) (b) of the SICA which mandates circulation of the draft

rehabilitation scheme for knowledge of the creditors. There is no

mention of creditors in Section 19 (1) of the SICA. Respondent No.1

Company being an unsecured creditor would, thus, have to stand at the

end even in the event of winding up of the petitioner Company under

the provisions of the Companies Act, 1956. Out of the total dues which

were outstanding from the petitioner Company, the extent of dues

payable to respondent No.1 were 11.47 per cent and thus the sanctioned

scheme could not be interfered with on the pretext of a minority stake

qua the dues.

19. We may, once again, at this stage point out that the aforesaid plea is

really not of much relevance as the expressions used in Section 19 (1) of

the SICA are not in respect of unsecured or secured creditor but the

benefit of Section 19 (2) of the SICA being made available to the

entities envisaged under Section 19 (1) of the SICA.

20. We have given our thoughtful consideration to the submissions

advanced by learned counsels for the parties. We are also conscious of

_____________________________________________________________________________________________

the fact that the impugned order does not reopen the chapter of the

sanctioned scheme which stands partly implemented and the petitioner

Company having come out of the woods. The rights in terms of the

impugned order have been given to respondent No.1 Company limited

to a hearing before the BIFR to examine as to how its debts are to be

treated keeping in mind that it is a PSU. However, the issue is not

whether a limited right is given or not but as to whether respondent

No.1 could fall within the definition of "other authority" as used in

Section 19 (1) of the SICA for it to enjoy certain special rights under

Section 19 (2) of the SICA even though it is an unsecured creditor.

Another connected question which would arise for consideration would

be whether the unpaid balance price for goods supplied would fall

within the definition of „Financial Assistance‟ by way of loans,

advances, or guarantees or reliefs or concessions or sacrifices. For the

said purpose construction would have to be given to Section 19 of the

SICA.

21. In our view the provisions of Section 19 of the SICA are clear in their

terms reflecting the intent of the legislature and there is no need to give

it an extended meaning by seeking resort to provisions of Article 12 or

Article 226 of the Constitution of India. The principles of literal

construction would apply in such a case. The plain, literal and

grammatical meaning have to be given effect to and if that is so done it

is not inconsistent with any expressed intention or declared purpose of

the SICA. The species specify in one category „a public financial

institution or State level institution or any institution or other authority‟.

The expression „any institution or other authority‟, thus, take their

colour from a „public financial institution or State level institution‟. _____________________________________________________________________________________________

22. We may also clarify that learned senior counsel for respondent No.1

was right in his contention that the bracketed portion of Section 19 (1)

of the SICA is for purposes of defining the expression „the person‟

required by the scheme to provide financial assistance when used in

other parts of the Section so that repeatedly it is not necessary to use

"any Government bank, institution or other authority required by a

scheme to provide such financial assistance". It is, thus, a defining

clause for the expression „the person‟.

23. Section 19 (1) of the SICA envisages the issue of financial assistance by

way of concession or sacrifices from certain entities and those entities

are, thus, required to have the benefit of the scheme being circulated and

the consent obtained under Section 19 (2) of the SICA. Thus, Central

Government and State Government are specifically mentioned in it.

Similarly, there is a mention of scheduled bank or other bank. After

„Central Government‟ there is a comma (,) whereafter the expression „a

State Government‟ is used, again breaking the sentence by a comma (,)

and thereafter „any scheduled bank or any other bank‟, which again is

followed by a comma (,). Thereafter the expression used in continuity

is „a public financial institution or State level institution or any

institution or other authority‟. We are, thus, unable to accept the plea of

learned counsel for respondent No.1 that the financial assistance by way

of concessions or sacrifices is from four different nature of entities as

canvassed. The different entities are broken up by inserting a comma (,)

and wherever similar nature of entities are there the expression used is

„or‟. Thus, the concessions or sacrifices are sought from:

a. Central Government,

b. State Government, _____________________________________________________________________________________________

c. any scheduled bank or other bank,

d. a public financial institution or State level institution or any

institution or other authority.

24. The petitioner cannot be permitted to break and create a separate

category of "other institution" when the word used is „or‟ prior to it.

The expression "other authority", thus, has to take a cue from the prior

expressions „a public financial institution or State level institution‟,

which is followed up by „or any institution or other authority‟ and must

be read ejusdem generis. The particular words in respect of the class,

category or genus are followed by the general words and thus must be

limited to things of the same kind as those specified. It is these nature

of institutions which fall within one category. The objective is also very

clear - these are institutions which may be providing financial

assistance in more manner than one to a sick company and may be

called upon to give concessions or sacrifices at the stage of

rehabilitation scheme.

25. Section 19 (1) of the SICA deals only with a provision made for

financial assistance by way of "loans, advances or guarantees or reliefs

or concessions or sacrifices" from the relevant entities. Thus, the words

"financial assistance" are qualified by such financial assistance only by

way of loans, advances or guarantees or reliefs or concessions or

sacrifices. The unpaid price for goods supplied certainly does not fall

within the definition of a loan or an advance or a guarantee. The

question arises as to whether it would fall within a relief or concession

or sacrifice. In our view, the mode and manner of use of these words in

the provision make it clear that the last three words take their colour

from the nature of transactions reflected specifically in the first three _____________________________________________________________________________________________

words, i.e., they have to be read in ejusdem generis. A financial

assistance by way of loans, advances or guarantees is a positive act by

which some more amount is given or guarantee is given for

rehabilitation of the company. On the other hand, reliefs, concessions,

sacrifices are acts where something is given up, i.e., in respect of loans,

advances, or guarantees by way of relief, concession or sacrifice. The

entity, thus, takes a lesser amount than due towards the loan, advance or

a guarantee. A pure commercial transaction of supply of goods and the

corresponding entitlement to recover the balance unpaid price would,

thus, not fall within this category and thus even otherwise the benefit of

the provisions of Section 19 (2) of the SICA are not available to

respondent No.1.

26. There is no doubt that respondent No.1 is a PSU. There is also no doubt

that there is no character of a public function attached to the transaction

in question which is a pure commercial transaction of sale of goods for a

price where part payment has been made and the remaining payment

undisputedly remains due. It is in that context that for the remaining

unpaid price respondent No.1 has been treated as an unsecured creditor

as it was not an entity which had lent any money against security. This

categorization of respondent No.1 under the heading of „unsecured

creditors‟ can, thus, not be doubted. It will make no difference that in

respondent No.1, being a PSU, the funds, control and management are

of the Central Government. The expression "other authority" cannot be

construed by clubbing it with „Central Government‟ or „State

Government‟ as it sought to be done by learned senior counsel for

respondent No.1 and thus there cannot be any question of taking any

colour from the meaning attached to "other authority" where that _____________________________________________________________________________________________

expression follows a different nature of expression used in Article 12 of

the Constitution of India for purposes of adjudication of rights in Part III

of the Constitution of India. In Article 12 of the Constitution of India

the expression "the State" has been included to define „Government and

Parliament of India and the Government and the Legislature of each of

the States and all local or other authorities within the territory of India

or under the control of the Government of India‟ and the same have

been construed to include PSUs for that purpose. Similarly, the unpaid

price will not also fall within the definition of a financial assistance by

way of loans, advances or guarantees or reliefs or concessions or

sacrifices.

27. The pronouncements of the Supreme Court cited by both the learned

counsels for the parties in Pradeep Kumar Biswas Vs. Indian Institute of

Chemical Biology & Ors. case (supra) and Life Insurance Corporation

of India Vs. Escorts Limited & Ors. case (supra) have, in fact, a

common thread running through it which distinguishes the nature of

commercial transactions which may be carried out by PSUs merely as a

contracting party which are distinguishable from actions which have a

State character or where the rights under Part III of the Constitution of

India are enshrined.

28. We are, thus, of the considered view that respondent No.1 is not entitled

to be covered within the definition of "other authority" within the

meaning of Section 19 (1) of the SICA nor can the unpaid price be

categorized as financial assistance by way of loans, advances or

guarantees or reliefs or concessions or sacrifices and thus is not entitled

to the notice under Section 19 (2) of the SICA. Respondent No.1 is,

thus, liable to be treated as an „unsecured creditor‟, as has been done by _____________________________________________________________________________________________

the BIFR, and in view of the scheme which has been duly approved in

accordance with law the entitlement is restricted to 10 per cent of the

principal amount being in the category of an unsecured creditor. We

may notice that it was pointed out to us that the petitioner has not paid

even that amount but then learned counsel for the petitioner pointed out

that the said amount had to be paid at certain stages and the installment

of the same has been brought to the Court by learned counsel for the

petitioner.

29. The writ petition is accordingly allowed and the impugned order of the

AAIFR dated 12.10.2010 is set aside making the rule absolute.

30. Parties are left to bear their own costs.

SANJAY KISHAN KAUL, J.

MAY 27, 2011                                            RAJIV SHAKDHER, J.
b'nesh

_____________________________________________________________________________________________