2000-(001)-CLJ -0145 -AAIFR Companies Act Judgements

2000-(001)-CLJ -0145 -AAIFR

ASIATIC OXYGEN LTD. v. BIFR AND OTHERS.

Appeal No. 47/99 against BIFR’s Order dated 3.5.99 in BIFR Case No. 179/89, decided on August 17, 1999.

BEFORE THE APPELLATE AUTHORITY FOR INDUSTRIAL & FINANCIAL RECONSTRUCTION, NEW DELHI

RAKESH DWIVEDI, Senior Advocate, AJAY K. JAIN, Advocate, AMARJIT SINGH, Chief Financial Advisor, for the appellant.

VIVEK SIBAL, Advocate, B. P. GUHA THAKUR, A/R, for Somany Pilkingtons Ltd.

ORDER

(Date of hearing : 13.8.1999.)

This is an appeal against BIFR’s order, dated 3.5.99 in case No. 179/89 holding that M/s. Asiatic Oxygen Ltd. (AOL) was no longer a sick industrial company and was discharged from the purview of the Sick Industrial Companies (Special Provisions) Act, 1985 (for short, SICA) vide BIFR’s order dated 28.2.97 as its networth had become positive, and that M/s. Somany Pilkingtons Ltd. (SPL) was free to seek appropriate legal remedy from the competent court and there was no bar to SPL filing suit or pursuing their cases in the competent courts.

2. The impugned order was passed on an application, dated 7.1.99 submitted by SPL to BIFR praying for permission under section 22(1) of SICA to continue with the proceedings in Suit No. 666/89 before the Hon’ble High Court at Calcutta (suit filed by SPL for the recovery of lease rentals and possession of 17,977 gas cylinders from AOL) and for restraining AOL/Promoter from disposing of AOL’s assets and properties in violation of the terms of the scheme sanctioned by BIFR for the rehabilitation of AOL. The hearing was scheduled by BIFR on 3.5.1999 at 11.00 a.m. Notice of hearing was issued to AOL and M/s. Sibal and Eradi, Advocates and Solicitors. The notice of hearing mentioned the Case No. 79/89 (Correct No. is 179/89). It did not mention the purpose of hearing. The notice did not include any mention of SPL’s application, dated 7.1.1999. A copy of SPL’s application was not sent by BIFR to AOL. SPL also did not send a copy of its application, dated 7.1.1999 to AOL. The address of M/s. Sibal and Eradi, Advocates and Solicitors, did not show the name of the party whom they represented. There was no way of AOL knowing the purpose of the hearing scheduled on 3.5.1999. AOL wrote a letter, dated 27.4.1999 to BIFR, stating, inter alia, that BIFR had by order, dated 28.2.1997 closed the proceedings in AOL’s case, that M/s. Sibal and Eradi, Advocates, had not represented any party during the hearing of AOL’s case by BIFR at any point of time, that the reason for fixing the hearing was not mentioned in BIFR’s notice, and that, therefore, the hearing was kept in abeyance until the matter was clarified. Nobody represented AOL at the hearing before BIFR on 3.5.99 when the impugned order was passed. As there was no proper notice of hearing to AOL, there was denial of natural justice to AOL. We were, therefore, inclined to remand the matter to BIFR for fresh consideration after hearing AOL. However, as the subject matter of hearing before BIFR was SPL’s prayer that section 22(1) of SICA for permission to it continue the proceedings in Suit No. 666/89 against AOL before Hon’ble Calcutta High Court, and as permission under section 22(1) of SICA can be sought direct from this Authority during the pendency of an appeal, and as the counsel for both AOL and SPL wanted the case to be heard and decided by this Authority on merits instead of being remanded to BIFR, we heard the appeal on merits.

3. AOL’s reference under section 15(1) of SICA was registered as case No. 179/89 by BIFR. On 4.6.90, BIFR declared AOL to be a sick industrial company within the meaning of section 3(1)(o) of SICA and appointed ICICI as operating agency (OA) under section 17(3) of SICA. After several hearings, on 8.10.93, BIFR sanctioned a scheme for the rehabilitation of AOL under section 18(4) read with it section 19(3) of SICA. Substantial reliefs and sacrifices were extended by secured creditors to facilitate the rehabilitation of AOL. Taking note of AOL’s annual report for the financial year ended on 31.3.96 and the fact that AOL’s networth had turned positive as on 31.3.1996, BIFR passed an order, dated 28.2.97 holding that AOL ceased to be a sick industrial company within the meaning of section 3(1)(o) of SICA, that its case no longer required to be dealt with by BIFR, that the proceedings in the case were, therefore, closed, but the obligations/responsibilities, if any, yet to be fulfilled by AOL shall remain in force, and it would be bound to fulfil the same as per the various covenants of the scheme sanctioned for its rehabilitation.

4. SPL had filed a suit (Civil Suit No. 666/89) before Hon’ble Calcutta High Court against AOL for recovery of possession of 17,977 gas cylinders and recovery of lease rental dues amounting to Rs. 213.70 lakhs along with interest from 17.8.89 and interest on judgment. The trial court held that SPL could proceed with the suit for recovery of its property, but the proceedings for the recovery of money would stand stayed. In SPL’s appeal 363/96 against the trial court’s order, the Division Bench of the Hon’ble Calcutta High Court examined at length the scope of section 22(1) of SICA while taking note of BIFR’s order, dated 28.2.1997 and, by order, dated 4.8.1998, upheld the trial court’s order and dismissed the appeal. The Hon’ble Calcutta High Court held that the scheme sanctioned by BIFR on 8.10.1993 is still under implementation and, therefore, the statutory bar under section 22(1) of SICA continues to it be applicable. SPL’s SLP (Civil) No. 19181/98 before the Hon’ble Supreme Court of India against the order, dated 4.8.1998 of the Division Bench of Hon’ble Calcutta High Court in appeal No. 363/96 was dismissed by the Hon’ble Supreme Court on 16.12.98.

5. The implication of BIFR’s jurisdiction in a case, in which a sick industrial company’s net worth has exceeded its accumulated losses, but the sanctioned scheme has not been fully implemented, were dealt with by this Authority in some detail in this Authority’s order, dated 9.7.96 in appeal 77/96 (M/s. Swan Mills Ltd. Kamgar Kapada Udyog Sahkari Society Ltd. v. BIFR and others). So long as the scheme is under implementation, BIFR has to exercise its jurisdiction under various sub-sections [particularly, sub-sections (5), (9) and (12)] of section 18 of SICA, notwithstanding the fact that the net worth has exceeded the accumulated losses. It is seen from the cash flow statement of the sanctioned scheme, dated 8.10.93 for AOL that repayments of certain dues (payment of deferred interest to financial institutions/banks, sales tax arrears, funded interest, etc.) have been scheduled upto the year 2002-03. BIFR cannot refuse to exercise its jurisdiction to ensure that such terms of the sanctioned scheme are fulfilled and give appropriate directions in case of any difficulties and consider proposals, if any, for review and modification in the sanctioned scheme. Had the sanctioned scheme been fully or substantially implemented, it would have been competent for BIFR to declared AOL as being outside the purview of SICA by declaring the scheme as fully implemented or terminated. So long as the scheme continues to be under implementation, jurisdiction of BIFR can be invoked and, in that view of the matter, BIFR’s order, dated 28.2.1997 cannot be interpreted to mean that BIFR can refuse to exercise its jurisdiction, if any, applications are received for review/modification of the sanctioned scheme or the removal of any difficulties or for monitoring the implementation of the terms of the scheme.

6. The impugned order was passed by BIFR on the ground that by their order, dated 28.2.1997, AOL was discharged from the purview of SICA. This ground, on which the impugned order was passed, is not tenable in view of this Authority’s order, dated 9.7.1996 in appeal 77/96, referred to above, and the Hon’ble Calcutta High Court’s order, dated 4.8.1998 in appeal No. 363/96, referred to above. The impugned order that SPL was free to seek legal remedy and file or pursue its case against AOL in court is, therefore, not tenable.

7. We have now to consider whether SPL should be granted permission under section 22(1) of SICA for continuance of proceedings for the recovery of lease rentals in its suit 666/89 before Hon’ble Calcutta High Court.

8. The learned counsel for AOL contended : in order to tide over liquidity crisis during 1985-86, AOL resorted to sale and lease-back of cylinders and as on 31.3.90 AOL’s total lease rental liability was Rs. 396 lakhs towards six lessors; lease rentals of one party were settled and paid prior to the sanction of the scheme and payment of lease rentals of Rs. 259 lakhs to 5 parties was provided in the sanctioned scheme; re-schedulement of payment of lease rentals of Rs. 259 lakhs was to be obtained from leasing companies as per the terms and conditions considered satisfactory by the banks/institutions (para 3 G(vi) of the sanctioned scheme); 4 parties had agreed to re-schedulement as proposed in the scheme, but one party, i.e., SPL had not agreed and this was pointed out to BIFR at the hearing on 8.10.93; the re-scheduled lease rental dues of Rs. 259 lakhs pertained to Bengal and Assam Company Ltd. (Rs. 15 lakhs), Oriental Leasing Co. Ltd. (Rs. 28 lakhs), Overseas Sanmar (Rs. 25 lakhs), Midwest Leasing Co. (Rs. 17 lakhs) and SPL (Rs. 174 lakhs); the re-scheduled lease rental dues of 4 parties have already been paid by AOL but SPL had not accepted the payment; AOL is willing to pay Rs. 174 lakhs to SPL along with interest from the dates on which these payments were due under the terms of the sanctioned scheme; AOL has been revived and SPL is now only trying to thwart the implementation of the sanctioned scheme by resorting to litigation; SPL was fully aware of the proceedings before BIFR but, after writing a letter, dated 16.1.91 to BIFR claiming lease rental of Rs. 3.5 crores, had never pursued the matter with BIFR and neither responded to the public notice inviting objections/suggestions to the draft scheme nor attended any hearing before BIFR to press its claim; the scheme is binding on all parties, including SPL, in view of section 32(1) and section 18(8) of SICA, and SPL is only entitled to receive Rs. 174 lakhs from AOL; AOL has disposed of some of its units as per the sanctioned scheme and is contemplating sale of some other units with the approval of the concerned banks/financial institutions, whereas SPL is only trying to thwart the profitable operations of AOL; SPL should accept the payment of Rs. 174 lakhs from AOL and the appeal be dismissed and the prayer of SPL for permission under section 22(1) of SICA be rejected.

9. The learned counsel for SPL contended : SPL filed suit 666/89 in Hon’ble Calcutta High Court for the recovery of cylinders and lease rental arrears of Rs. 213.70 lakhs from AOL and the dues have by now risen to about Rs. 9 crores; SPL was never informed that the scheme included payment of lease rentals of Rs. 174 lakhs to itself; the distribution of the lease rentals provided in the scheme has been given by AOL only at this stage when this appeal is being heard; the scheme does not provide for any sacrifice or write off on the part of SPL and, therefore, SPL has no obligation to make any sacrifice; AOL/promoter are not implementing the scheme properly, and they have sold AOL’s unit at Ranipet as a going concern to Praxair India (P) Ltd. and have planned to sell all their remaining units also to Praxair India (P) Ltd. even though the sale of these units is not included in the sanctioned scheme; in this way, SPL apprehends that its security will be diluted; clause 3 G(vi) required AOL to obtain re-schedulement of lease rentals from the various leasing companies but no such re-schedulement was obtained by AOL from SPL; if SPL’s dues were included in the scheme, AOL had an obligation to make payment to SPL but, despite having sold some of its industrial units, it has not made any payment to SPL; AOL/promoter are not implementing the scheme, but only claiming protection under section 22(1) of SICA by pleading that the scheme is under implementation; the appeal be dismissed or SPL be permitted to continue its suit 666/89 before Hon’ble Calcutta High Court for the recovery of its lease rental dues from AOL.

10. Our conclusions on the contentions of the learned counsel for AOL and SPL are given below :

(a) The sanctioned scheme, dated 8.10.93 continues to be under implementation. Several provisions of the scheme will continue to be implemented upto the year 2002-2003 unless the implementation thereof is achieved earlier than due dates. Protection under section 22(1) of SICA continues to be available to AOL during the implementation of the scheme. BIFR has to exercise its jurisdiction under section 18 and various other provisions of SICA until the scheme is fully implemented or terminated on account of substantial implementation including discharge of the financial obligations under the scheme.

(b) SPL has a locus standi insofar as its own interests are concerned. It cannot assume the role of a monitor of the scheme.

(c) AOL cannot modify the sanctioned scheme on is own. During the period of implementation of the scheme, if it sells or proposes to sell any industrial unit(s) in addition to the three industrial units which were sold in accordance with the terms of the sanctioned scheme, it has to approach BIFR for necessary modification and comply with BIFR’s direction in this regard.

(d) SPL is an unsecured creditor. It is not one of those persons whose consent is required under section 19(1) and (2) of SICA. The question of rights of unsecured creditors and repayment of their dues by the sick industrial companies for which rehabilitation schemes are sanctioned under section 18(4) of SICA has been dealt with by this Authority in several appeals. In the event of winding Up of a sick industrial company, the sale proceeds from the disposal of the assets of such company are distributed amongst secured creditors and workers in proportion to their dues; their dues are likely to be fully realised; unsecured creditors and shareholders are unlikely to get anything at all. In rehabilitation schemes for sick industrial companies under the provisions of SICA, financial institutions/banks and Central/State Governments often extend reliefs and sacrifices; unsecured creditors cannot expect to receive payment of their dues and interest. However, if a sick industrial company has large surplus assets, which are not required for its manufacturing activity and can, therefore, be sold, and the sale proceeds are expected to be not less than the financial obligations of such company, then payments can be provided to creditors without sacrifices by them. On the other hand, if a sick industrial company is revived through a rehabilitation scheme approved by BIFR, envisaging reliefs and sacrifices and financial accommodation by financial institutions/banks and Central/State Governments as well as induction of fresh funds by the promoters, then the unsecured creditors cannot expect to derive benefit from such post-scheme prosperity of the company to which they have not made any contribution. Therefore, the provision made for the payment of the dues of unsecured creditors in any scheme for a sick industrial company under section 18(4) of the Act has to be considered as a provision for full and final settlement of their pre-scheme dues. It is open to them to make their submissions before BIFR by responding to public notice of draft rehabilitation scheme so that their claims are given appropriate consideration by the operating agency and BIFR. Any other approach to the pre-scheme dues of unsecured creditors would, in our view, be inconsistent with section 2 of SICA whereby a declaration is made that SICA is for giving effect to the policy of the State towards securing the principles specified in clauses (b) and (c) of Article 39 of the Constitution.

11. In the present case, nothing has been brought to our notice by SPL, nor is there anything in the record before us, to suggest that prior to the sanction of the scheme on 8.10.93 by BIFR, AOL had surplus assets, not required for its manufacturing activities, which could be sold and the sale proceeds therefrom could meet all the financial obligations of AOL towards its creditors, statutory authorities and workers. After writing a letter, dated 16.1.99 to BIFR, SPL did not appear before BIFR to make its submissions regarding its dues. It was open to SPL to pursue its case with the OA and BIFR, respond to the public notice of draft rehabilitation scheme and attend the hearing before BIFR after obtaining a copy of the draft scheme, and press its claims. Even after the sanction of the scheme by BIFR, SPL could have sought redressal of its grievance by preferring an appeal under section 25 of SICA. It is, therefore, obvious that SPL had, by its conduct, acquiesced in the scheme sanctioned by BIFR on 8.10.93. Clause 3 G(iv) of the scheme stipulates that re-schedulement of lease rentals is to be obtained from the leasing companies according to the terms satisfactory to financial institutions/banks. It does not require consent of leasing companies. It only requires satisfaction of financial institutions/banks. It does not require consent of leasing companies. It only requires satisfaction of financial institutions/banks. As the scheme was sanctioned with the consent of financial institutions/banks, and as SPL did not resort to legal remedies against the sanctioned scheme, it cannot now challenge that scheme. Therefore, whatever provision is made in the sanctioned scheme for the payment of pre-scheme lease rentals due to SPL by AOL, that has to be treated as full and final settlement of the, pre-scheme lease rental dues. The terms of the sanctioned scheme have the overriding effect over other laws by virtue of section 32(1) of SICA and are binding on all shareholders, creditors, guarantors and employees by virtue of section 18(8) of SICA. It is not necessary to make any specific provision for sacrifice or write off on behalf of unsecured creditors, because no consent of unsecured creditors is required under section 19 of SICA. We have no reason to doubt that a provision for payment of Rs. 174 lakhs in instalments to SPL over the period 1992-1998 is included in the total provision of Rs. 259 lakhs payable to leasing companies during that period.

12. AOL’s case is that SPL refused to accept the payment of Rs. 174 lakhs in instalments provided in the sanctioned scheme and withdraw its suit in Hon’ble Calcutta High Court. SPL’s case is that AOL never made or offered any payment. Instead of going into this controversy, we consider it appropriate that AOL should now pay this amount of Rs. 174 lakhs to SPL along with simple interest at 12% per annum, in full and final settlement of the pre-scheme lease rental dues of SPL, upto the date of payment. In order to avoid further disputes about the quantum and due dates of instalments of Rs. 174 lakhs, we have worked these out as follows : Rs. 10.08 lakhs (31.3.92); Rs. 20.15 lakhs (31.3.93); Rs. 28.22 lakhs (31.3.94); Rs. 28.89 lakhs (31.3.95); Rs. 28.89 lakhs (31.3.96); Rs. 28.89 lakhs (31.3.97); Rs. 28.88 lakhs (31.3.98). These amounts are to be paid with 12% interest upto the date of payment by way of one lump sum payment. Both AOL and SPL to submit statements in suit 666/89 before Hon’ble Calcutta High Court for a consent decree as stated above. Permission is granted to SPL for the recovery of the amount calculated as above in full and final settlement of its pre-scheme lease rentals due from AOL. BIFR’s order stands modified accordingly. The appeal stands disposed of.

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