Delhi High Court
M/S. Agarpara Company Ltd. vs Appellate Authority For ... on 15 July, 2013
Author: S.Ravindra Bhat
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Decided on: 15.07.2013
+ W.P.(C)4301/2013
M/S. AGARPARA COMPANY LTD. ..... Appellant
Through : Mr. Akhil Sibal, Mr. Jatin Mongia
and Mr. Sandeep Bisht, Advocates.
versus
APPELLATE AUTHORITY FOR INDUSTRIAL AND
FINANCIAL RECONSTRUCTION & ORS.
..... Respondents
Through : Mr. Amit. S. Chaddha, Sr. Advocate
with Mr. Atanu Mukherjee and Ms. Shalini
Kapoor, Advocates, for Resp. No.3.
Mr. Anirben Sen, Advocate.
Mr. Neeraj Kishan Kaul, Sr. Advocate with Mr.
C. Mukund and Mr. Ashok Jain, Advocates, for
Resp. No.5.
Mr. Tanuj Khurana, Advocate, for Resp. No.6.
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE NAJMI WAZIRI
MR. JUSTICE S.RAVINDRA BHAT (OPEN COURT)
%
CAV. 579/2013 TO 582/2013
Learned counsel for the caveators have put in appearance.
Cav. 579/2013 to 582/2013 are accordingly discharged.
W.P.(C)4301/2013 Page 1
W.P.(C) 4301/2013, C.M. APPL.9983/2013 (for stay), C.M.
APPL. 10060/2013
1. M/s Agarpara Company Ltd (ACL), the petitioner,
challenges the order of the Appellate Authority for Industrial &
Financial Reconstruction (AAIFR), dated 13.06.2013, under
Section 25 of the Sick Industrial Companies (Special Provisions)
Act of 1985 (SICA). That appeal had been preferred against an
order of the Board for Industrial and Financial Reconstruction
(hereinafter "BIFR") dated 20.10.2010, whereby that authority (the
BIFR) held that Mr. Ghanshyam Sarda was the real
promoter/owner of the Respondent No. 3 in this writ, M/s.
Agarpara Jute Mills Ltd (AJML).
2. Briefly, this case revolves around the financial
reconstruction and rehabilitation of AJML. Based on its audited
balance sheet of 31.03.1993, AJML filed a reference before the
BIFR under Section 15(1) of SICA, and was declared sick in terms
of Section 3(1)(o) of the Act on 14.07.1995. In the facts relevant to
the present dispute, three stages are important: At the first stage, on
being declared sick, the BIFR observed that the scheme prepared
by the Operating Agency appointed under the Act was inadequate
and ordered for winding up of AJML on 17.12.1999. This order for
winding up was quashed by the Calcutta High Court on 08.07.2004,
and AJML was ordered to present an alternate plan for
rehabilitation. Accordingly, on 29.09.2004, AJML submitted a
rehabilitation proposal, and the BIFR through its order dated
W.P.(C)4301/2013 Page 2
06.02.2007 directed circulation of the DRS for
objections/suggestions. Till this date, neither party to the present
petition presented any facts alluding to a dispute as to ownership.
Subsequently, however, in the second stage of this dispute, two
rival factions emerged within the sick company, one headed by Mr.
Ghanshyam Sarda and the other by the present petitioners, ACL.
The petitioners claim that Mr. Ghanshyam Sarda, acting through
various instrumentalities, took over the management of the sick
company in the interim. Contrary to this, the Respondent claims
that it was always in control of the sick company, having, at all
relevant times, possessed the requisite shares to display ownership
and relying on the fact of payment of salaries and other dues to
employees of the sick company. The Petitioner further claims that,
contrary to the object and purpose of the SICA, the Respondent
appointed 3 and 8 directors on 29.11.2008 and 24.01.2009,
respectively, thereby constructing a false majority. The events of
29.11.2008 and onwards are disputed by the Appellant specifically,
though the Appellant admit de facto control of the Sarda Group,
and its payment of dues/salaries (paragraph 6 of the impugned
order). Finally, the third stage of this dispute revolves around the
shareholding of AJML and the ability of ACL to propose a DRS of
its own for the purposes of circulation and objection. Here, the
Petitioner claims that out of a total of 1,00,007 shares of AJML,
1,00,001 shares were owned by it; thus the petitioner was the
holding company for AJML. However, as these shares were found
missing, on application to AJML, duplicate shares were issued to
W.P.(C)4301/2013 Page 3
the holding company, the petitioner herein. On this basis, the
petitioner claims that being a majority shareholder, the
management and constitution of the Board of Directors as it existed
prior to the influx of new directors represents the correct
management of the sick company, AJML. Contrary to this, the
Respondent claims that these duplicate shares were improperly
issued, on the basis of an application from the same person, Mr.
Mahender Sharma, to himself, in two different capacities in AJML
and ACL, and that a total of 1,00,001 shares were always held by
the Sarda Group.
3. The above constitute the backdrop of facts, for the challenge
to the impugned order of the AAIFR, which is disputed on two
grounds: first, that the impugned order recognizes - incorrectly and
without jurisdiction (the latter argument emanating from an
apparent conflict of jurisdiction of the AAIFR/BIFR and the
Company Law Board) - that the management of AJML is
represented by the Sarda Group as it currently stands. Second, that
the impugned order incorrectly directs the circulation of the DRS
proposed by the current management, without recognizing the
petitioners' DRS as well.
4. On the first ground, the AAIFR categorically held that the
jurisdiction of the BIFR does not extend to adjudicating
management or ownership issues in companies inter se, and that
the Company Law Board is the appropriate forum for such
questions (paragraphs 8-10 of the Impugned Order). However, for
the "limited purpose" of ensuring rehabilitation and reconstruction
W.P.(C)4301/2013 Page 4
of the sick company, the AAIFR notes that it has "to recognize and
deal with the current management ... of the sick company"
(paragraph 8 of the Impugned Order), without giving "any finding
as to who is the real promoter/owner of the company which is
presently under adjudication before the CLB" (paragraph 9 of the
Impugned Order)
5. In this case, the petitioner seeks three reliefs, i.e. quashing of
the AAIFR order to the extent it recognizes the present
management of the company as falling to the Sarda group; a
direction to mandate the circulation of the petitioner's DRS and an
order prohibiting circulation of the Respondent's DRS.
6. Mr Akhil Sibal argued that AAIFR completely ignored and
failed to appreciate the issue that the disputes as to who the present
management is, being in dispute, the circulation of an alleged Draft
Rehabilitation Scheme for revival of the fourth respondent being
considered was divorced from the principles of natural justice and
in gross violation of SICA. ACL, being a 42% stake holder
supported by remaining 58% stake holders in the fourth respondent
and having acquiesced to the Draft Rehabilitation Scheme
submitted by the Operating Agency in terms of the Calcutta High
Court's order dated 8th July, 2004, that scheme is entitled to be
considered as a Draft Rehabilitation Scheme for the purpose of
revival of the company. The scheme sought to be circulated as the
scheme of the present management, is really a scheme of the
interloper, led by Ghanshyam Sarda, which, identifies the sale of
the third respondent's landed assets and properties to infuse fresh
W.P.(C)4301/2013 Page 5
funds for revival of the fourth respondent. On sale of such land,
there will be nothing left to revive. The land is situate in an
industrially viable portion of West Bengal and can fetch a market
value of more than `1,000 crores. This amply demonstrates the
intention of Ghanshyam Sarda to take over the fourth respondent
and with the aid of orders of BIFR and AAIFR, sell off the assets
of the company and misappropriate the proceeds for his personal
enrichment and gain.
7. It is argued that in the present scenario, since the entire issue
of management of the fourth respondent is shrouded in disputes,
claims and counter claims, AAIFR could not have directed a
particular scheme, presented by an interloper, to be considered for
its viability. AAIFR, it is submitted, overlooked to appreciate that
the duly constituted management of the respondent No.4 to which
the petitioner had acquiesced had already been granted liberty
and/or leave to propose a Draft Rehabilitation Scheme in terms of
the order of the Calcutta High Court dated 8th July, 2004.
8. It is contended that in view of the admitted position, the
petitioner should be allowed to pursue the DRS formulated
originally and that denial of relief would lead to irreparable
prejudice to the petitioner.
9. This Court is of the opinion that the AAIFR correctly
recognized and held that the proper forum for adjudication of
ownership or management disputes in companies is the Company
Law Board, a special body constituted for those matters, and not
the BIFR. Yet, in order to ensure that this division of jurisdictions
W.P.(C)4301/2013 Page 6
does not preclude the reconstruction of sick companies where
management is contested, it stands to reason that the BIFR also has
a limited authority to recognize the present management of the
company, without prejudice to the Company Law Board's ultimate
decision, in order to deal with some management for the purposes
of rehabilitation. Indeed, a contrary conclusion would render the
BIFR incapable of communicating with all sick companies,
through their Board of Directors, where management is contested
and thus, preclude it from performing its statutory function.
10. In this case, neither does the BIFR order constitute a
judgment on the legal validity of the management, nor does it
prejudice the right of either faction to the ultimate benefits of
ownership, as and when decided by the Company Law Board.
Moreover, as the AAIFR recognizes in its order: "No prejudice
would be caused to the appellant if the sick company is revived
without their effort as they would be entitled to all the benefits of
its ownership if and when they get an order in their favour from the
competent forum, i.e. the CLB" (paragraph 8 of the impugned
Order).
11. The petitioner's claims are mutually contradictory. The
petitioner requests this Court to issue a writ prohibiting the
circulation of the Respondent's DRS, asking rather for the
recognition of its own DRS. Entering the same question, and the
fact of allowing one DRS and not another, would draw the Court
into an exercise of determining which management is legally valid
and correct under the Companies Act and related laws; an exercise
W.P.(C)4301/2013 Page 7
which the petitioner itself admits falls within the special
jurisdiction of the CLB. Accordingly, for that precise reason, to
avoid litigation on the question of which management ought to,
under the law, represent the sick company, and focus solely on the
factual question of which management, as of the date of hearing
before the BIFR, has de facto control, the AAIFR's order is
reasonable. This limited factual determination allows for the
BIFR/AAIFR to proceed with the rehabilitation of the company,
without any of the attendant legal complexities of determining the
validity of ownership/management that are assigned to another
statutory body under the Companies Act and related laws.
12. The breadth of the authority vested in the BIFR for the
management of sick companies has been recognized. For example,
in Pasupati Fabrics Ltd and Ors v. Priyanka Overseas Pvt. Ltd.
and Ors., [2006] 132 Comp Cas 113 (Delhi), this Court at
paragraph 51 noted that "from the date of registration of reference,
there is a complete take over by the BIFR which assumes total
control and the company is to function thereafter as per the
mandate of the BIFR. It is the BIFR which has to decide how the
company is to be rehabilitated and sanction the scheme, which
would be a package deal, for operation of the functioning of such a
company. The company has to thereafter function as per the
provisions of the scheme sanctioned. As noted above, these
provisions may provide for the complete take over by the new
management, new Board of Directors, new constitution of the
company with altered Memorandum and Articles of Association
W.P.(C)4301/2013 Page 8
and even reduction of the interest or rights of the existing
shareholders and allotment of shares of such a company to some
other persons, particularly the creditors."
13. Furthermore, this Court is of opinion that, equally, Courts
must be cautious of interfering with the functioning of the BIFR in
such instances of proceedings involving rival factions battling for
the management of a sick company. This was specifically
recognized by the Andhra Pradesh High Court in B. Subba Reddy v.
Appellate Authority for Industrial and Financial Reconstruction,
2008 (1) ALT 113, in noting the "utmost importance that the
courts do not lengthen the proceedings before BIFR unless such
interference is absolutely imperative for well defined reasons in the
interest of the creditors as a whole and in the interest of the
workers and the sick industry itself, but not in the interest of a
particular management." The question in this case is precisely of
supporting the DRS of one management faction over another, and
entertaining such a relief would fall foul of the limited supervisory
function played by the Court in instances of action taken by the
BIFR. Similarly, in Dharam Godha v. Universal Paper Mills Ltd.,
[2012] 110 CLA 32 (Cal), paragraphs 11-13, the AAIFR's
discussion and recognition of a particular management was
acknowledged by the Calcutta High Court.
14. The AAIFR, by the impugned order has said that since there
were disputes about the ownership and challenges regarding the
acquisition of shares had to be decided or resolved by the Company
Law Board, at the same time, the DRS pending before the BIFR
W.P.(C)4301/2013 Page 9
had to be decided. To ensure that the company's rehabilitation
process did not suffer, the AAIFR proposed that the proposals of
the Sarda group, which appeared to be (to it) in de facto control,
should be considered on merits. At the same time, the petitioner
group was also permitted to participate in the hearings. There is, in
this Court's opinion, no unreasonableness or irregularity with the
approach of the AAIFR in its impugned order.
15. Finally, Learned counsel for the petitioner submits that he
would not be pressing additional grounds number 7.35 and XXXV,
alleging that "one of the Members sitting (sic) in the present Bench
is a close friend of Sh. Ghanshyam Sarda. The Bench is biased
against the Petitioner".
16. For the above reasons, the writ petition is dismissed with no
order as to costs.
S. RAVINDRA BHAT
(JUDGE)
NAJMI WAZIRI
(JUDGE)
JULY 15, 2013
W.P.(C)4301/2013 Page 10
