Alcatel-Lucent India Ltd. vs Usha India Ltd.
2012 Latest Caselaw 3662 Del

*               IN THE HIGH COURT OF DELHI AT NEW DELHI

                          W.P.(C) 12723 OF 2012
%                                  Judgment Reserved on:9.2.2012
                                  Judgment Delivered on:01.6.2012


ALCATEL-LUCENT INDIA LTD.                             . . . PETITIONER
                 Through :                  Mr. N.K. Kaul, Sr. Adv. with
                                            Mr.Samrat Singh Kachwaha,
                                            Adv.

                               VERSUS

USHA INDIA LTD.                                        ... RESPONDENT

                         Through:           Mr. Vibhu Bhakru, Sr. Adv. with
                                            Mr. Anand Mishra, Adv. for R1
                                            Mr. Sachin Datta, CGSC for
                                            BIFR

CORAM :-
   HON'BLE MR. JUSTICE A.K. SIKRI
   HON'BLE MR. JUSTICE RAJIV SAHAI ENDLAW


A.K. SIKRI, ACTING CHIEF JUSTICE:

1. The petitioner feels aggrieved by the action of the respondent Usha

India Limited in making repeated references before the BIFR and appeals

therefrom before the AAIFR, even when previous references made by the

petitioner were rejected. The grievances of the petitioner is that it amounts

to continuous and systematic abuse of process resorted to by Usha India

limited with the sole motive of delaying and defeating the rights of its

creditors. Usha has been filing repeated references before the BIFR and

getting for itself protection of the provisions of the Sick Industrial Companies

(Special Provisions) Act, 1985 which it is otherwise not entitled to. To

highlight the purported mala fides and abuse on the part of the Usha, the

petitioner traced the following events in its petition.

2. On 30.7.2002 Usha filed its first Reference before BIFR which was

registered as Reference no. 117/2002, claiming losses of ` 1015.24 Crores. In

just three months, the said Reference was rejected. The BIFR, vide a detailed

order recorded that far from losses, the net worth of Usha is positive by `

800.73 Crores. The following findings of the BIFR‟s order dated 28.10.2002

are relevant:

"...The Company made investments of ` 504 crores in these companies during 1996-2000. The profit of the company during this period was ` 66.25 cores. The company disinvested in many of the sister concern companies. These were both quoted and unquoted investments. The company has not disclosed to whom these investments were sold and as to how the funds were realized."

"...AS explained above, funds aggregating ` 504 crores were made in preference shares, 0% FCDs and these investments were not entirely made out of the profits of the company. The system adopted by the Company about

valuation of unquoted investments was neither transparent nor consistent. The investments cannot be considered having completely eroded, especially when UIL was the promoter of these companies and the investments were made as promoter‟s contribution to draw long term benefits.... The contention of the company that it had raised cash by dis-investing in sister concerns during 1997-98 to 1999-2000 is also not supported with any evidence as to how and to whom these investments were sold. The company has been manipulating its investment portfolio..."

"...The net worth of the company would become positive by ` 800.73 crores after disallowing the losses to the extent of ` 1015.24 crores as discussed".

3. On 12.03.2003, Usha filed an appeal against the aforesaid order dated

28.10.2002 before the AAIFR. On 4.8.2006 i.e. after about three and half

years, the above appeal (appeal against the first reference rejection) was

finally disposed off by the AAIFR, which affirmed that there has been

manipulation of accounts by Usha in order to establish sickness. Some

portions of the AAIFR order which may be noted are:-

"....No doubt a company is not barred from making investments outside. However, such huge investments outside, all of which has turned bad, at the cost of running the appellant company itself cannot be considered as an example of bona fide wrong intention. This company had net worth nearly 833 crores but as early as 30.6.1996 it had invested ` 1554 crores outside itself; such huge investments outside the company cannot be considered as bonafide mistakes. No company can be absolved of the action of investing outside consciously, at

the detriment of the parent company, and therefore claim sickness."

4. The findings of the BIFR as affirmed by the AAIFR on 4.8.2006 were

not challenged by Usha. Therefore, the same became final and binding. Yet,

Usha continues to illegally carry forward these disallowed losses in

subsequent references which act according to the petitioner is a complete

abuse of legal process and claiming protection for years on a reference based

on such losses is patently illegal, and designed solely to deny creditors the

window for execution.

5. While the appeal against the first reference was pending before the

AAIFR, Usha in the year 2003 filed another Reference (second Reference)

before BIFR which was registered as Reference No. 316/2003. This was in

relation to the accounting year 2003. Usha carried forward the disallowed

losses in its books for the year 2003 and further exaggerated the losses for the

year 2003 to ` 1198.28 crores. This reference was finally rejected by BIFR

on 8.2.2006 with the following crucial findings:

"BIFR records that Usha‟s auditors themselves stated in their report for the year 2004 that the accounts do not give a true and fair view in conformity with the accounting principles."

"...the sickness of the company has been brought upon itself deliberately and the company has not become sick in the normal course.."

6. The BIFR records that the net worth of the company is ` 845.27 crores

as on 31.3.2003.On 9.11.2006 Usha filed an appeal before AAIFR against

BIFR‟s above order of 8.2.2006 (Appeal No. 322/2006). This appeal was

dismissed on 2.9.2008 i.e. after about two years. AAIFR has found that the

second reference was not based on any new fact that Usha had merely carried

forward disallowed losses. Again this finding of the AAIFR has not been

challenged. This clearly indicates that Usha is not concerned with supporting

its position. It finds it simpler to file repeated references and keep them

pending for years and thus illegally enjoys the protection granted under SICA.

7. It is further averred that as Usha was enjoying the protection of SICA,

it deliberately did not file any reference for the years 2004 and 2005, thereby

further showing that it was only interested in defeating/delaying its creditors.

After waiting for all these years, Usha filed a fresh Reference (Third

Reference) to BIFR being case No. 26/2008 (filed on 12.11.2007). On

14.8.2008 the said Reference was taken up for consideration to determine the

status of Usha‟s sickness. It was brought to the BIFR‟s notice by

representatives of the IFCI, the Export-Import Bank of India and other

creditors that two earlier References No. 117/2002 and 316/2003 had been

rejected as the net worth of Usha was positive. It was also recorded by BIFR

that there was insufficient information submitted by Usha in its Form „A‟ no

Factory License was submitted and there were reservations in the Auditors

report. Then the BIFR records that in fact the advocate for Usha admitted that

the company was not in operation since 2002. Nonetheless, instead of

rejecting this reference on the ground that admittedly Usha lacked "industrial

character‟ and there could be no claim to sickness, the BIFR continued with

the matter though it was a regular case and fixed 24.9.2008 as the next date

of hearing.

8. The third reference was finally disposed off on 11.11.2009 i.e. after

two years, with the BIFR noting that Usha has admittedly remained closed

since 2002, and it did not possess an industrial license on the date of filling

the reference. Thus, the BIFR held that Usha did not qualify to apply for

SICA protection as it was not an "industry" within the meaning of Section 3

(1) (o) of the SICA. On 12.1.2010 Usha filed an appeal against the above

order. (Appeal No. 9/20100. The appeal was admitted and notices were

issued on 15.3.2010.

9. Based on the aforesaid averments in the petition, the submission of

the petitioner is that there is not an iota of genuineness in these references

and the BIFR and AAIFR have repeatedly held so. This has now been going

on for nearly 10 years (the first Reference being made in July, 2002).

Conclusive findings of the BIFR and AAIFR, to the effect that Usha has

fudged/maintained irregular accounts to illegally depict sickness are on

record. In fact, even its statutory auditors do not accept/ approve of Usha‟s

accounting practices. Yet, Usha continues to file references based on the

same losses, which the BIFR and AAIFR have repeatedly disallowed and/or

with incomplete information and/or with caveats and disclaimers by its

auditors. Though these references are finally rejected, by the time the order

rejecting the same is passed ( and affirmed in appeal), Usha has enjoyed

protection under the provisions of the SICA and its creditors have been

denied their rights under the decree.

10. It is pout that the petitioner has a monetary decree dated 6.9.2004 in

its favour but has not been able to execute the same because of the

protection enjoyed by the Usha under SICA.

11. Mr. Neeraj Kaul, learned Senior Counsel appearing for the petitioner

submitted that the law has to be enforced in such a manner that the dubious

persons are not able to misuse and abuse the process and/or exploit the

provisions to their advantage in a malafide manner. It was argued that this

Court has been vested with very wide powers under Article 227 to ensure that

the stream of justice remains pure and unadulterated. The said power

includes the power to guide the supervise subordinate courts and tribunals in

order to ensure the ends of justice. Various judgments in this regard have

been cited during the course of hearing. According to the petitioner, in light

of the facts set out above, it is only with judicial intervention that the

perpetual malpractices being carried out by Usha would come to an end. Mr.

Kaul, thus, pleaded that this Court should lay down suitable guidelines

directing the BIFR to perform a pre-registration scrutiny (as required in law)

before registering future references filed by Usha to ensure that there are new

and genuine grounds entitling Usha to file the reference and that the reference

is not based on the same grounds which the BIFR and AAIFR have repeatedly

disallowed. It was submitted that as per the post registration stage,( which

will come into play only after the pre-registration scrutiny described above),

the statute stipulates time and again that the enquiry be completed within 60

days but that has not happened even once (though the first reference was

disposed of within 3 months). Mr. Kaul concluded his submissions by

making a passionate plea for issuance of necessary and appropriate

directions/orders in the interest of justice or otherwise Usha shall continue

the abuse of process and rights of its creditors permanently defeated.

12. The petition is contested by Usha. The learned counsel for the Usha

raised preliminary objection by submitting that writ petition had become

infructuous as the reference of Usha before the BIFR had been rejected vide

order dated 11.11.2009 and at present there are no proceedings pending

before the BIFR with respect to Usha. It was also argued that the petitioner

has an alternative and equally efficacious remedy. Replying to the allegation

of making repeated references by Usha resulting in availing protection under

Section 22 of the SICA, it was submitted that the protection available to the

sick company under Section 22 of SICA is not absolute and any person

seeking to proceed against the Company has a right to apply and take leave

of the BIFR or AAIFR in this regard and proceed against the company. In

this context, the learned counsel emphasized the following aspects:-

(i) That the petitioner is not pressing any application under Section 22 (1) of the SICA before AAIFR to proceed against the respondent company.

(ii) The petitioner has filed execution proceeding against the respondent M/s Koshika Telecom Ltd. and there has been no impediment, on account of reference filed by the respondent company, preventing the petitioner from pursuing with the execution proceedings. On the contrary, the execution proceedings were delayed as M/s

Koshika Telecom Ltd. is in liquidation and all its assets are in possession of the Official Liquidator attached to this Court and the petitioner had not approached the Company Court despite the liberty granted by the Ld. Single Judge 5 years ago and has failed to file its claim before the official liquidator attached to this Court. Even the execution proceedings have since been concluded for want of available assets with the judgment debtor.

13. It was also submitted that when the law permits making of reference

under Section 15 (1) of the SICA in the event the final accounts of an

Industrial Company for the relevant period indicate that the net worth of the

company has been eroded and Usha had been making reference since

satisfying the aforesaid condition. It was argued that though the first

reference for the year ending 30.11.2001 had been rejected on the ground that

Usha‟s networth was positive, if certain amount advanced by the Company

which had been written off are not considered. In the subsequent year, the

Usha had clearly disclosed that there was no possibility of recovering the

amount and therefore, there was no question of networth of the company

being considered as positive.

14. Refuting the contention of the petitioner, it was contended that there

was no such power with the Register, BIFR under BIFR Regulations or in the

BIFR Rules as it amounts to discharge of judicial function which Registrar

could not undertake. He argued that BIFR and AAIFR are statutory bodies,

established under Section 4 and 5 of the SICA respectively. Section 4 (1)

provides for Establishment of BIFR to exercise the jurisdiction and powers

and discharge the functions and duties conferred or imposed on the Board by

or under this Act. Section 12 of the SICA further expressly provides that

"(1) The jurisdiction, power and authority of the Board or the Appellate Authority may be exercised by the Benches.

(2) The Benches shall be constituted by the Chairman and each Bench shall consist of not less than two Members.

(3) If the Members of a Bench differ in opinion on any point, the point shall be decided according to the opinion of the majority, if there is a majority but if the Member are equally divided, they shall state the point or points on which they differ and make a reference to the Chairman of the Board, or as the case may be, the Appellate Authority who shall either hear the point or points himself or refer the case for hearing on such point or points by one or more of the other Members and such point or points shall be decided according to the opinion of the majority of the Members who have heard the case including those who first heard it."

15. He also referred to Section 36 of the SICA which provides that the

Central Government may make Rules to carry out the provisions of SICA,

but such subordinate legislation cannot supplant, repugnant and contrary to

the statute itself. Relying upon the provision of Section 16 of the SICA, he

submitted that the power and duty to enquire into the working of the Sick

Company is expressly conferred upon the BIFR by virtue of Section 16 of

the SICA only and it would not be open for the Secretary, BIFR or any other

functionary of BIFR except the Bench to enquire and determine as to whether

the company is a sick company or not. According to the learned counsel the

role of Registrar, BIFR is thus limited to examining whether reference under

Section 15 is complete and that the same can be put up before a competent

Bench of the BIFR. Regulation 19 of the BIFR Regulations indicates the

same, whilst sub regulation (1),(2) and (3) of Regulation 19 of the BIFR

Regulations provide for manner of making and communicating the reference

to the BIFR. Sub Regulation (4) and (5) of Regulation 19 provide for the

receipt and scrutiny of the reference respectively. A harmonious reading of

Section 16 of SICA and Regulation 19 of the BIFR Regulation indicate that

scrutiny of the reference by the Registrar is limited to ensure that the same is

in the form as provided under Regulation 19 (1) or 19(2) has been received

alongwith the prescribed documents. In terms of Regulation 19 (3) it would

not be open for either the Registrar or the Secretary, BIFR to adjudicate any

contentious issues or to embark upon the enquiry whether the company

making the reference is a sick company or not in exercise of its powers under

Section 19 (5). Similarly, Rule 4 of BIFR Rules cannot be interpreted to

empower the Secretary BIFR to decide as to the sickness of the company.

Any issue arising out of the reference would necessarily have to be limited in

relation to the form, extent of information and receipt of the reference and the

issues relating to the inquiry into the sickness of a company is not

contemplated. It is further submitted that the contention that the Registrar or

the Secretary itself determine or adjudicate the contentious issue as to whether

a company is sick or not at the time of receipt of the reference and before its

registration, is patently erroneous and liable to be rejected.

16. We have considered these submissions of counsel for the parties, made

at the Bar.

17. At the outset, we would like to remark that even though no reference is

pending at present and looking from this angle, we could have disposed of the

writ petition without passing any effective order. However, the matter cannot

be treated in the manner projected by the learned counsel for the respondent.

Present case itself eloquently demonstrates that there can be misuse of the

machinery provided under the SICA by making repeated references year

after year; taking advantage of the manner in which such references are

admitted, consequence of which is that all proceedings against such a

company shall stand stayed under Section 22 of the SICA; to gain time

endlessly with repeated references even when previous references are

rejected on merits.

18. We would like to start our discussion by stating that in any insolvency

regime, there is an apparent conflict between the issues involved, namely,

recovery of the dues of the creditors from a company,

restructuring/rehabilitation of an insolvent company and effective liquidation

process/system to ensure timely liquidation of the companies which cannot be

revived. Interests of all groups concerned with these aspects are paramount:

whether it be of creditors in the recovery of their debts or that of an insolvent

company seeking revival. Above all, public interest including the economic

interest of the nation which is paramount is subserved only when interest of

all the aforesaid groups is protected. It is for this reason balancing of these

purported rival and antagonist interests becomes a delicate task. All kinds of

creditors and investors in a company would like to put their money at stakes

only if they are reasonably confident that they would be able to recover the

money invested; be it shareholder, debenture holder or a financial institution

giving credit to such a company. Not only they want reasonable returns on

the money invested, they want recovery of their investment also in the time of

need. If a feeling is generated that money invested may be put in jeopardy,

investors may stop making investments.

19. It is equally important that when an industrial company becomes

insolvent first attempt has to be made to rehabilitate and restructure such a

company. The reason is obvious. Insolvent industrial companies, when

remain insolvent, result in blockage of sizeable national resources which may

have cascading effect on all sectors of economic and social life of the nation.

It may, in addition, put the creditors in a spot as it becomes difficult to

recover their dues in such an eventuality. The ill-effects of insolvency in

industrial companies would be loss of production, loss of employment, loss of

revenue to Central and State Governments and locking up of investible funds

of banks and financial institutions. This became cause of serious concern to

the Government and the society at large and this concern was accentuated by

the alarming increase in the incidence of insolvency in industrial companies.

The Parliament of India enacted the insolvent Industrial Companies (Special

Provisions)Act, 1985 (SICA) . The enactment of this legislation was

recognition of the fact that in order to fully utilise the productive industrial

assets, afford maximum protection of employment and optimise the use of

funds of the banks and financial institutions, it would be imperative to revive

and rehabilitate the potentially viable insolvent industrial companies as

quickly as possible. It would also be equally imperative to salvage the

productive assets and realise the amounts due to banks and financial

institutions, to the extent possible, from the non-viable insolvent industrial

companies through liquidation of those companies. It was felt that the

existing institutional arrangements and procedures for revival and

rehabilitation of potentially viable insolvent industrial company were both

inadequate and time consuming and a comprehensive law was needed. The

Act as originally enacted, made provisions for identification of insolventness

in industrial companies fixing on the Board of Directors of such a company

the responsibility to report such insolventness to the Board of Industrial and

Financial Reconstruction (BIFR) which has been set up under this Act for

evolving suitable measures to rehabilitate/revive the company. This Act

operates and is sought to be implemented through a three-tier system,

namely, (i) Operating Agency, (ii) the Board, and (iii) the Appellate

Authority. The Operating Agency is essentially the hand-tool of the Board to

carry out some investigations and legislation provisions. The scheme of the

Act visualises:-

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

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

(c) the further determination by the Board are due consideration that the hopes of the company are belied and it cannot or has failed to make its net worth positive and, therefore, the permanent sanction of a scheme of revival is necessary. The further consideration is that such a scheme is not practicable or that the financial assistance, concessions and reliefs necessary to make the scheme successful are not forthcoming and, therefore, the formation of an opinion by the Board that it is just and equitable to wind up the company. These are essential jurisdictional parameters of the Board and beyond these it cannot and need not travel. Till the whole exercise is gone through, the jurisdiction and parallel proceedings under all other Acts (to the extent provided in Sections 22 and 23) cannot lie or be proceeded with."

Thus one of the salient features is contained in Section 22 of SICA

which mandates that no proceedings against the company for recovery of dues

shall proceed with during the pendency of proceedings before BIFR.

20. Once reference is admitted, the provision of Section 22 of the SICA,

gets triggered and it comes to the aid of such a company. Section 22 (1)

provides that in case the inquiry under Section 16 is pending or any scheme

referred to under Section 17 is under preparation or consideration by BIFR or

any appeal under Section 25 is pending then certain proceedings against the

industrial company are to be suspended or presumed to be suspended. The

nature of proceedings which automatically attract the provisions of the

suspension are:-

 Winding-up of the industrial company.

 Proceedings for execution of distress against the properties of

sick industrial company.

 Proceedings for the appointment of receiver.

The Sick Industrial Companies (Special Provisions) Amendment Act,

1993 has brought the following proceedings also within the purview of the

provisions of Section 22(1):

 Suit for recovery of money.

 Suit for enforcement of any security or any guarantee in respect

of any loans or advances granted to the company.

It has been stated that such proceedings shall be suspended and if it is

intended by the concerned party that the proceedings are to be continued

against the sick industrial company then prior consent or approval of BIFR

should be taken. Once the enquiry under Section 16 is treated to be pending,

the provisions of Section 22 are attracted and the company court cannot

proceed further the matter. {see Maruti Udhyog Ltd. Vs. Instrumentation

Ltd. (1995) 82 Comp Cas 455 (Guj.)}. Thus the suspension of the

proceedings would commence as soon as the inquiry under Section 16 is

ordered by the Board. Section 16 (3) provides that the inquiry should be

completed as expeditiously as possible and preferably within sixty days.

The Board may appoint Operating Agency for the purpose of completion of

the inquiry. Depending upon the outcome of the inquiry, the BIFR can order

actions to be taken by the sick industrial company under the provisions of

Section 17. It is clear from the provisions of Section 22 (1) that proceedings

in a civil suit are liable to be suspended or stayed only when an enquiry under

Section 16 is pending or any scheme referred to under section 17 is under

preparation or consideration or a sanctioned scheme is under implementation

or where an appeal under section 25 relating to an industrial company is

pending. (See Shri Hari Mills P. Ltd. Vs. Hanumantha Reddy and Co.

(2009) 148 Com Cas 81 (Kar.) The starting point of suspension of

proceedings is the commencement of the inquiry under Section 16 and the

terminal point is the implementation of the scheme or, as the case may be, the

disposal of the appeal by the appellate authority. (see C.J. Gelatine Products

Ltd. In re (1994) 81 Comp Cas 890 (Bom.) ). The settled law is that the

deemed date of commencement of inquiry for the purpose of section 22 of the

Act is the date of submission of reference under Section 15. In other words

once a company is registered with the Board for Industrial and Financial

Reconstruction, all proceedings filed against a company must be stayed

forthwith and shall not be proceeded with without the consent of the Board.(

See Rishabh Agro Industries Ltd. Vs. P.N. B. Capital Services Ltd. (2000) 5

SCC 515. ) This was so held by the Supreme Court in the case of BSI Ltd.

Vs. Gift Holding Pvt. Ltd. (2000) 100 Comp Cas 436 in the following

words:-

"The word "suit" envisaged in section 22(1) cannot be stretched to criminal prosecutions. The suit mentioned therein is restricted to "recovery of money or for enforcement of any security against the industrial company or of any guarantee in respect of any loans or advance granted to the industrial company". As the suit is clearly delineated in the provision itself, the context would not admit of any other stretching process."

21. Thus, when the effect of submission of reference under Section 15 is

that Section 22 of SICA gets triggered, appropriate steps needs to be taken to

ensure that this provision is not misused. It is a matter of concern that over a

period there has been rampant abuse of this provision.

22. The experience of the working of the SICA has been far from

satisfactory. This enactment was formulated as an alternative to the process

of recovery through civil courts, which was a very time consuming process

and the winding up through the companies Act where hardly any recoveries

could be made by the financial sector, while at the same time, ensuring that

social and economic fallout of the said two routes of recovery could be

avoided. However, unfortunately the new system set up in place of SICA met

with only limited success. On the contrary it lent itself to gross misuse of

some of its provisions particularly Section 22 of the Act.

23. As mentioned above, present case appears to be one where prima facie

the provisions of Section 22 of the SICA are taken undue advantage of.

Therefore, at least in those cases where the reference was rejected in previous

years on merits by the BIFR, guidelines can be issued to ensure that fresh

references in subsequent years should not be mechanically entertained.

24. Learned counsel for the respondent may be right in contending that

while registering the references, the Registrar cannot act as quasi judicial

authority which is the function of the Board. However, in order to ensure that

such situation does not recur, at least in those cases where the reference is

rejected earlier, matter can be referred to directly to the BIFR and BIFR

should look into the same and to decide whether it is a case for admitting the

reference. Even if BIFR decides it to admit after finding that the conditions

for the same are satisfied, it can still take a decision as to whether the

provisions of Section 22 should be allowed to prevail or not. Section 22

stipulates that proceedings can go on with the consent of the Board/BIFR and

the Board can in such cases pass a general order giving such a consent. At

that stage, in such cases, where the references were rejected previously, the

BIFR can pass appropriate directions refusing to extend the benefit of Section

22 of the SICA.

25. We, thus, dispose of this writ petition with the direction that BIFR

should formulate necessary Practice Directions in the light of our aforesaid

discussion within three months and issue the same for compliance.

26. Writ petition stands disposed of in the aforesaid terms.

ACTING CHIEF JUSTICE

(RAJIV SAHAI ENDLAW) JUDGE JUNE 1, 2012 skb