Interads Advertising Pvt. Ltd. vs Sivalik Cellulose Ltd.
2013 Latest Caselaw 1863 Del

         IN THE HIGH COURT OF DELHI AT NEW DELHI

                          CO. PET. No. 5 of 1985

                                        Reserved on: April 11, 2013
                                        Decision on: April 25, 2013


        INTERADS ADVERTISING PVT. LTD.        ..... Petitioner
                     Through: Ms. Vandana Bhatnagar and
                              Ms. Surbhi Sharma, Advocates for
                              Mr. Inder P. Choudhrie/Applicant in
                              CA 714 of 2006

                               versus


        SIVALIK CELLULOSE LTD.                  ..... Respondent
                     Through: Mr. Ashok Sagar, Advocate for
                               Hindustan Lever Limited.
                               Mr. Sanjay Bhatt and
                               Mr. Abhishek Anand, Advocates for
                               IDBI.

         CORAM: JUSTICE S. MURALIDHAR

                            JUDGMENT

25.04.2013

Co. Appl. No. 714 of 2006

1. This is an application by Mr. Inder P. Choudhrie, former Director of Sivalik Cellulose Limited ('SCL') seeking, inter alia, various directions to Hindustan Lever Limited ('HLL') to honour all the liabilities and commitments which arose during the period which SCL was under its management and control.

2. The background to the present application is that SCL was promoted by the Applicant, Mr. Inder P. Choudhrie, in June 1975. A plant for the manufacture of writing and printing paper with 20 tonnes per day capacity, at a cost of Rs. 312.59 lakhs, was set up at Gajraula, Moradabad District, Uttar Pradesh ('U.P.'). Although the company started production in January 1979, it was unable to achieve a production capacity higher than 10 to 12 tonnes per day, which was lower than the break-even point of about 17 tonnes per day. SCL continuously incurred cash losses and suspended operations in March 1982. As on 30th June 1986 SCL had accumulated losses of Rs. 653 lakhs. Industrial Development Bank of India ('IDBI') was one of the secured lenders of SCL in whose favour there was a mortgage of title deeds as well as hypothecation of movable properties, plant and machinery of SCL. As SCL failed to repay the loans, IDBI filed a mortgage Suit No. 1323 of 1983 in the Bombay High Court. By an order dated 25th July 1983 the Bombay High Court appointed an ad interim Receiver of the properties of SCL.

3. At that stage Interads Advertising Private Limited filed Company Petition No. 5 of 1985 in this Court under Sections 433, 439 and 443 of the Companies Act, 1956 ('Act') against SCL seeking its compulsory winding up on the ground of its inability to pay its debts. By an ex-parte order dated 9th December 1986 SCL was wound up by this Court and the Official Liquidator ('OL') was appointed as a Liquidator of the company.

4. IDBI filed a Company Application No. 221 of 1988 under Section 50 of the Industrial Reconstruction Bank of India Act, 1984 ('IRBI Act') proposing a Scheme by which SCL was to be rehabilitated to manufacture toilet soaps. It was stated that the said Scheme had been examined by various financial institutions which had advanced monies to SCL. While directing notice to issue in the said application on 8th March 1988, the Court required either IRBI or the Applicant to file a feasibility report along with comments to the application.

5. In an order dated 21st March 1988 it was noted by the Court that the Scheme as proposed under the IRBI Act postulated participation of HLL which was to be entrusted with the task of manufacturing of toilet soaps. HLL has also filed an application seeking certain modifications to the Scheme. By an order dated 17th March 1989 a public notice was directed to issue with regard to the Scheme and a Chartered Accountant ('CA') was also appointed to audit the accounts of the company.

6. On 15th February 1990 this Court passed a detailed judgment allowing IDBI's application under Section 50 of the IRBI Act thereby approving the Scheme (Exhibit A) which was directed to form part of the judgment. The Court observed that it was satisfied that the Scheme ensured the reconstruction, revival and rehabilitation of SCL and also ensured an increase in the production of the goods. Consequently, the winding up order dated 9th December 1986 was rescinded and affidavits of compliance were directed to be filed.

7. As noted in the above judgment, it would be economical for HLL to undertake the Scheme as proposed only if the production capacity of 30,000 tonnes per annum ('TPA') was treated as additional capacity. The financial institutions/banks had also supported the submissions of HLL. Accordingly, this plea of HLL was accepted. In terms of the Scheme, it was contemplated that HLL "shall have an option to purchase the soap unit, during the period of the lease, being a period of five years, from commencement of lease, at a pre-determined price of Rs. 4 crores". The Court approved the said provision. As regards the additional liability pertaining to the claims of Railways, Central Excise and Sales Tax Departments, it was noted that while contesting the above claims after the constitution of the new management of SCL, the Applicant Mr. Inder P. Choudhrie should also be associated as he would be aware of the facts. The prayer of the parties that there should be a moratorium for a period of six years for the payment of the additional liabilities was also approved.

8. The Scheme approved by the Court contained a clause titled 'Basic Assumptions'. One of these was that HLL would have no obligation to revive the paper plant and that "the existing utilities and building of the paper plant would be utilised, as far as possible, for the soap packing operation to reduce capital expenditure while ensuring the repayment of all debts (old and new) within the time period as agreed herein." The other basic assumptions read as under:

"(b) (i) HLL will pay conversion charges to SCL @ Rs. 1,000 per tonne of soap packed under Phase-I and Rs. 1,900 per tonne of soap manufactured and packed after implementation of Phase-II of the project.

(ii) In addition, HLL will bear any statutory duty like sales tax, etc., if any, that might be attracted on this lease transactions during the lease tenure.

(c) HLL would review the position periodically and increase conversion charges to an appropriate level in step with escalation in wages, power cost, etc. However, HLL would guarantee the projected volumes as well as the net generation as envisaged in the Scheme, available for payment of interest and repayment of total dues to bank/institutions and other liabilities.

(d) HLL will ensure capacity utilisation @ 66% during the 1st 2 years and 90% from 3rd year onwards.

(e) There will be no payment/repayment to HLL in the event of any default to financial institutions/bank.

(f) HLL will arrange working capital for soap project.

(g) (i) Lease would be initially for a period of 12 years, renewable for another term of 12 year at the option of HLL.

(ii) The lease will commence from the date of the commencement of production under Phase-I or 12 months from the date of obtaining High Court's approval under Section 50 of the IRBI Act, 1984 and other appropriate approvals, including approval under Section 29 of FERA, whichever is earlier."

9. Among the basic assumptions were some concerning SCL which read as under:

"(i) The soap undertaking of SCL (on lease to HLL and even thereafter when HLL exercises its option to purchase the same) will

have no liability for the erstwhile labour/workmen of the paper undertaking of SCL, in respect of employment, non-employment or conditions of services and the soap undertaking of SCL (on lease to HLL and even thereafter when HLL exercises its option to purchase the same) shall not have any obligation in respect of the past employees of SCL's paper undertaking. If any such liability arises or is fastened on SCL, the same will borne by SCL. HLL will have no responsibility towards such liabilities. During the period of lease, SCL will arrange to recruit the requisite manpower and manage and supervise their working and HLL shall have no responsibility for employment/non-employment of the work force, which would exclusively vest with SCL.

(j) The unsecured liabilities of Rs. 55 lakhs, including promoter's loan of Rs. 22 lakhs (as may be certified by the auditors), would be restricted to a maximum of Rs. 75 lakhs. Any excess current liabilities at the time of exercising the purchase option beyond Rs. 42 lakhs (Rs. 75 lakhs minus Rs. 33 lakhs proposed to be paid out of net/generation during the 4th year), which includes the promoters loan of Rs. 22 lakhs (approximately) arising out of the operation of soap plant, would be borne by HLL."

10. The specific clause concerning additional liabilities is Clause 6.4(a) which reads as under:

"6.4 (a) The Scheme formulated by IRBI envisages a total of Rs. 530 lakhs as dues to financial institutions banks. In the balance sheet, prepared by the auditors this figure has been shown as Rs. 10,66,92,635. HLL assumes that the total liability of SCL towards the financial institutions/banks would be restricted to Rs. 530 lakhs as envisaged in the revival scheme. Similarly, current liabilities have been estimated in the revival scheme at Rs. 55 lakhs comprising of Rs. 33 lakhs for third parties and Rs. 22 lakhs for the promoters. The auditor's report estimates these liabilities and

contingent liabilities at Rs. 5,47,29,03, primarily on account of significant potential liabilities (hereinafter referred to as additional liabilities) towards excise duty, sales tax, interest on sales tax, and freight and demurrage. The current liabilities and provisions would, therefore, need to be restricted to Rs. 55 lakhs.

(b) A moratorium of six years will be granted in respect of these additional liabilities. These additional liabilities will be paid out of the purchase price of the soap plant, if the option to purchase the said plant is exercised by HLL or out of the processing charges paid by HLL to SCL if the option to purchase the soap plant is not exercised by HLL.

(c) If there are any additional liabilities not contemplated in the original scheme (other than the additional liabilities set out hereinabove), the same shall also be paid out of the purchase price of the soap out of the purchase price of the soap plant, if the option to purchase price of the soap plant, if the option to purchase is exercised by HLL or out of the processing charges paid by HLL to SCL if the option to purchase is not exercised by HLL.

(d) The repayment of the additional liabilities will not affect the repayment schedule of the institutions/banks."

11. Uttar Pradesh State Industrial Development Corporation Limited ('UPSIDC') had to be paid Rs. 63 lakhs with interest in terms of the Scheme as approved by the Court. UPSIDC was not satisfied with the arrangement and therefore filed Company Application No. 392A of 1990 seeking modification of the judgment dated 15th February 1990 almost five months thereafter. Meanwhile, Union of India ('UOI')'s appeal against the judgment dated 15th February 1990 was rejected by the Division Bench by

its judgment dated 16th November 1990. However, even thereafter, UPSIDC did not actively pursue its application. HLL took over the factory and ran it for a period of 12 years. HLL filed Company Application No. 1177 of 2004 seeking a direction to the secured creditors of SCL to take back the possession of the unit. In the said application the Court passed the following order on 9th November 2004:

"CA No. 1177/2004 in CP No. 5/1985 In this application filed by M/s. Hindustan Lever Limited, it is stated that since 12 years period as per the scheme for reconstruction approved by this Court expired and the Applicant does not wish to continue with the lease for any further period, the possession of the unit be taken back by the secured creditors. Learned counsel for IDBI submits that possession has since been taken over by the IDBI and money received.

In view of this statement, learned counsel for the Applicant submits that no further orders are required to be passed in this application.

However, learned counsel appearing for Indian Overseas Bank/R-3 and Respondent No. 4 submits that M/s. Hindustan Lever Limited has yet to comply with certain directions contained in the Scheme. If that be so, they would be at liberty to file an appropriate application in this behalf.

With the aforesaid liberty, this application is disposed of."

12. Thereafter UPSIDC filed a Company Application No. 506 of 2005 praying that its earlier applications be taken up for hearing. By an order dated 28th April 2005 this Court rejected Company Application Nos. 392

and 392A of 1990 filed by UPSIDC after noting that UPSIDC did not file any appeal or petition against the judgment dated 15th February 1990.

13. In its order dated 2nd September 2009 this Court noted the statement of the Applicant in Company Application No. 714 of 2006 that prayers 13, 14 and 15 of the application were not being pressed. The remaining prayers in the application are for directions to HLL to comply with its obligations under the approved Scheme. Inter alia it is prayed that HLL should be permitted to make good the loss to SCL on account of short payment of processing charges amounting to Rs. 2,430 lakhs along with interest @ 18% per annum from the due date of payment till the actual date of payment. The other prayer is that HLL should be directed to make good the loss of Rs. 500 lakhs to SCL on account of unauthorized removal and sale of the critical plant and machinery at a throwaway price to itself thereby rendering the entire plant and machinery a lot of junk. SCL also claims a sum of Rs. 800 lakhs for the machinery that was to be left after implementation of Phase-II. It is also prayed that HLL should be directed to pay damages of Rs. 20 lakhs on account of follow up of various pending litigations and also release the original title deeds of 34.76 acres leasehold land of SCL at Gajraula, District J.P. Nagar (U.P.) from IDBI. It is claimed that the other financial institutions should be directed to issue no dues certificates and execute the necessary forms in order to satisfy their outstanding charges.

14. HLL has filed a detailed reply denying the above averments in the application. As part of the preliminary objections HLL has pointed out that the lead financial institution IDBI has given a full and final discharge to

HLL and IDBI has further confirmed that the processing charges payable to SCL had been pledged for the purposes of repayment of all the term loans of the financial institutions as well as the banks. It is stated that the project cost for Phase-I went up to nearly Rs. 700 lakhs as a majority of the plant and equipment of the paper plant was found missing and could not be utilized. HLL claimed that processing charges of Rs. 2.70 crores per annum were paid. HLL in fact paid each year, from the third year onwards amount far in excess of Rs. 3 crores per annum to SCL towards processing charges. It is pointed out that the lease came to an end on 30th September 2004. On 19th July 2004 HLL wrote to the financial institutions stating that it did not desire to renew the lease and further it was not exercising its option to purchase the soap plant at Gajraula. Accordingly, IDBI and other financial institutions were requested to make appropriate arrangements for taking over of the infrastructure facilities at Gajraula together with all documents and records. Pursuant thereto representatives of the IDBI and HLL as well as Mr. Inder P. Choudhrie visited the factory at Gajraula and a complete inventory was taken on all assets and files relating to SCL including files relating to sales tax, income tax and accounts. In a joint meeting dated 12th August 2004 which was held at the office of the IDBI at Mumbai, it was informed that Mr. Inder P. Choudhrie was not interested in running the unit and that he would like to retrieve his investment. Accordingly, a plan to complete the formalities of the handing over of the assets and documents to the majority shareholders, namely, IDBI was drawn up. It is stated that on 30th September 2004 HLL had completed all formalities in the presence of public financial institutions and promoters. HLL also made the full and final payment of an amount of Rs. 73,48,991 to IDBI towards the settlement of

the term loans of the financial institutions and the bank. A due discharge was also issued by IDBI to HLL. Thereafter, Mr. Inder P. Choudhrie, the Applicant herein wrote to HLL raising certain allegations. HLL clarified its position by letter dated 31st October 2005 and also raised a counter claim of Rs. 81,22,072 as owing to HLL by SCL towards payment of salaries and wages of managers and supervisors who were on deputation to SCL for the period 1998 to 2002. It was further pointed out that all records including statutory records, records relating to income tax assessment, sales tax assessment etc. were handed over by HLL to IDBI on 30th September 2004. The relevant documents were also enclosed with the reply.

15. This Court has heard the submissions of Ms. Vandana Bhatnagar, learned counsel for the Applicant, Mr. Ashok Sagar, learned counsel for HLL and Mr. Sanjay Bhatt, learned counsel for the IDBI. Written submissions have also been filed by the parties.

16. The first contention of learned counsel for the Applicant is that HLL has failed to settle various demands/liabilities appearing in the balance sheet as on 30th September 2004 to the tune of approx. Rs. 13.45 crores. Secondly, it is submitted that only Rs. 11.08 lakhs had been paid to the Income Tax Department ('ITD') till date and no provision has been made in respect of the balance tax and interest thereon at approx. Rs. 22.50 lakhs. Even the tax deducted at source ('TDS') certificate for Rs. 2.75 lakhs was not issued by HLL.

17. The above submission has been considered. Clause 5.1(c) of the Scheme clearly stated that HLL would take over the entire liabilities outstanding at the time of disposal to all the bank/institutions both existing and future, and "not any other additional liabilities (including sales tax, excise duty and dues to the railways) which shall be met out of the sale proceeds of the soap plant". Further the above clause was to take effect only if HLL opted to purchase the soap plant including land, buildings and other facilities at Gajraula used by the soap plant. Clause 5.1(c) of the Scheme also envisaged that if that option was not exercised by HLL, then the above statutory liability was to be paid out of the processing charges paid by HLL to SCL. Further the debt would get enhanced to Rs. 6 crores only if HLL exercised its option to implement Phase-II of the soap manufacturing capacity. The conversion charges to SCL of Rs. 1,900 per tonne of soap packed was to be paid in terms of Clause 6.3(b)(i) after implementation of Phase-II of the project, i.e., after the manufacturing unit was set up. Neither did HLL opt for purchasing the soap plant nor did it proceed with Phase-II of the project. According to HLL it paid SCL conversion charges in excess of Rs. 3 crores per annum. This is not denied by SCL. In the circumstances the contention of the Applicant that SCL should have been paid enhanced conversion charges is untenable.

18. At the time of handing over of the plant to IDBI on 30th September 2004, HLL also paid Rs. 73,48,991 towards full and final payment under the rehabilitation Scheme. Annexure 'D' to the reply of HLL is a letter dated 30th September 2004 written by IDBI to HLL regarding handing over of the assets and acceptance of the aforementioned amount discharging HLL from

any liability. In its affidavit as well as written submissions filed before this Court on 19th October 2012 IDBI reiterated that it had issued a 'no dues certificate' dated 14th February 2005 in favour of HLL. Subsequently, IDBI had also sold its entire equity holding in SCL to one Mr. Ramakant as acknowledged by Mr. Inder P. Choudhrie himself in his letter dated 16th February 2005 written by him to Mr. Gurdeep Singh, ex-Chairman of SCL. Consequently, the plea of the Applicant that HLL failed to discharge its liabilities in terms of the Scheme is without any basis.

19. It is next contended that HLL owes the Applicant arrears of conversion/processing charges to the tune of Rs. 24 crores. As pointed out in its reply HLL enhanced the conversion charges which were required to be paid only if Phase-II was implemented at the option of HLL. Consequently, this plea of the Applicant is without merit and is rejected as such.

20. It is then contended that in gross violation of its authority, HLL's nominees dominated the Board of Directors of SCL and sold the plant and machinery worth Rs. l,25,09,574 for a paltry sum of Rs. 15,03,148 between 6th July 2004 to 9th July 2004 after having decided not to take over the assets or to renew the lease. Further, it is alleged that the machines were sold by HLL nominees to HLL itself as "old and discarded machinery" and the same were dispatched to their plant at Orai in U.P. It is submitted that in the absence of such plant and machinery, the rest of the machines at the plant were rendered useless. It is contended that since HLL was not a junk trader no such transaction could have been effected in the normal course of its

business. It is prayed that HLL should be held guilty of causing willful loss to SCL to the tune of approx. Rs. 5 crores.

21. It is seen that in a board meeting of SCL held on 4th June 2004 which was attended by Mr. Inder P. Choudhrie, the Board was informed that the equipments in fact had got rusted and could not be used unless heavy expenditure was incurred. Quotations had been invited from two-three parties, including HLL for the sale of such equipment. In the meeting, Mr. Inder P. Choudhrie suggested that as the machines were idling it would be better to dispose them of to the highest bidder. As a result the plant and machinery was sold to HLL which was the highest bidder. The Court is unable to discern any malafides on the part of HLL. The allegations by the Applicant in this regard are unsubstantiated.

22. It is next contended that HLL has charged an amount of Rs. 1,52,32,900 from SCL on account of salaries and wages payable to managers and supervisors stated to have been deputed to SCL's factory for the period 1998-2002. It is submitted that the above provision was in respect of the paper unit of SCL which HLL neither ever revived nor was under any obligation to revive and not of the soap plant for which managers and supervisors were actually deputed.

23. As far as the above submission is concerned, HLL has denied charging Rs. 1,52,32,900 from SCL towards wages of the employees who were sent on deputation to SCL. It is stated that in the handing over docket, HLL had mentioned that Rs. 81,22,072 was payable to it towards balance part

payment of salaries and wages of managers and supervisors on full time deputation to SCL factory. In the circumstances, the above plea of the Applicant is rejected.

24. The Applicant states that HLL was responsible for clearing the dues of UPSIDC. In a joint meeting held on 12th August 2004 the Applicant informed about a claim of Rs. 209 lakhs against SCL. It is seen that the land cost to the extent of Rs. 63 lakhs has been met by HLL and the responsibility of getting a no dues certificate from UPSIDC was that of SCL. Under the Scheme as approved by the Court, there appears to be no basis for fastening on to HLL the liability owing to UPSIDC.

25. It is then contended that in terms of the Scheme HLL upon implementation of both the phases would have added plant and machinery to the tune of Rs. 800 lakhs and due to non-implementation of Phase-II, SCL was deprived of such assets that were to be left by the lessee and the loss on that score has been quantified as Rs. 718.18 lakhs. As already noticed, there was no compulsion on HLL to proceed with Phase II of the Scheme. It was an option that HLL did not exercise. This submission of the Applicant is rejected as being misconceived.

26. As regards the tax liabilities, HLL is right in contending that there was no obligation on it to pay the said dues. According to the Applicant since 1998-99 the ITD had been assessing SCL under Section 115J/JA of the Income Tax Act, 1961 on the basis of book profits, disregarding the fact that SCL is a sick company. HLL cannot be held liable for being responsible for

the said losses. The full discharge of HLL has been certified by IDBI itself. Therefore, this submission of the Applicant is rejected.

27. The application is accordingly dismissed.

S. MURALIDHAR, J.

APRIL 25, 2013 Rk