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

ALOK DHIR, Advocate, A. K. VAISHAMPAYAN, Chartered Accountant, S. BALAKRISHNAN, Manager, for the appellant. 

MS. VARSHA BHARAT RAUT; DARIUS KHAMBATTA, Advocate; BHARAT RAUT, Chartered Accountant, MS. VIBHA DATTA MAKHIJA, Advocate, for the Caveator 

Ms. RAKHI RAY and Ms. BINA GUPTA, Advocates, for Ms. Pushpa P. Vora. 

ORDER 

(Date of hearing : 13.8.1999.) 

This is an appeal against BIFR's order, dated 2.12.97 in Case No. 11/89 regarding M/s. Voras Exclusive Tools Private Limited (VETL). 

2. By order, dated 16.8.89, BIFR declared VETL to be a sick industrial company within the meaning of section 3(1)(o) of the Sick Industrial Companies (Special Provisions) Act, 1985 (for short, 'the Act'). On 9.7.90, BIFR took note of an agreed rehabilitation package submitted by VETL and concluded under section 17 (2) of the Act that it was practicable for VETL to make its networth positive within a reasonable time by implementing the said package under section 17 (2) of the Act. On 21.2.95 and 30.9.95, BIFR reviewed the progress and noted the VETL had departed from the rehabilitation plan submitted earlier under section 17 (2) of the Act, and that VETL's networth was still negative by Rs. 75 lakhs. BIFR concluded. [.....] (sic) failed and appointed Bank of India (BoI) as the operating agency (OA) under section 17(3) of the Act for preparing a proper rehabilitation scheme for VETL. BIFR simultaneously directed VETL to submit a comprehensive rehabilitation proposal based on one time settlement (OTS) of the dues of the financial institutions and banks to the OA, within one month. On 20.12.95, CMD of VETL informed BIFR that VETL's networth will become positive by the end of December, 1995, that ICICI's dues were already settled in February, 1992, that Hong Kong Bank's dues had also been settled, that IDBI (which had filed a suit in 1991 against VETL for recovery of a sum of a Rs. 23.84 lakhs) was not ready to discuss the matter, and that BIFR's intervention in finalisation of IDBI's dues would be welcome by VETL. BIFR directed VETL to submit their audited balance sheet for the year 1995-96 by the end of May, 1996, and directed the OA to give a detailed comments on VETL's balance sheet with particular emphasis of payment to unsecured creditors and the position of settlement of IDBI's dues. On 26.6.96, BIFR expressed its displeasure towards VETL for not submitting the audited accounts for the year 1995-96, and again directed VETL to submit the balance sheet for the year 1995-96 positively by 30.9.96. On 9.10.97, the counsel for VETL informed BIFR that the accounts for the year ending 31.3.96 could not be finalised because the annual general meeting (AGM) of VETL's shareholders could not take place on account of dispute between two groups of stake-holders of VETL, that as per audited accounts for 1995-96, VETL's accumulated losses were only Rs. 9.70 lakhs, and that provisional accounts for 1996-97 were also ready. The representative of BoI(OA) stated before BIFR that VETL's networth was positive and it was no longer sick, and as such, it should be out of BIFR. The counsel for VETL and the other group of shareholders agreed that the audited balance sheet for 1995-96 could be relied upon for determining the issue of sickness. BIFR again directed VETL to submit copies of the balance sheet as on 31.3.96, even if it was not finalised in the AGM of VETL. By a letter, dated 5.11.97 addressed to BIFR, VETL submitted a copy of the audited accounts of VETL for the year 1995-96 and the provisional accounts for the year 1996-97. In its letter, dated 5.11.97. VETL inter alia stated that the AGM for the year 1995-96 could not be held due to stay by the Company Law Board, and subsequently, by Hon'ble Delhi High Court, and that VETL had increased the share capital and achieved positive networth by the period ending 31.3.96. BIFR took note of the factual financial position submitted by VETL and passed the impugned order, that as on 31.3.96, the networth of VETL, consisting of paid-up capital plus free reserves, was Rs. 1,02,60,542 and exceeded the accumulated losses of Rs. 9,70,400. BIFR concluded that this case did not require to be monitored under the Act as VETL has turned around on its own and is no longer sick, and directed that further proceedings in this matter be closed, and that IDBI would be at liberty to pursue the legal remedies against VETL in respect of its dues. This order has been assailed in the present appeal. 

3. The learned counsel for VETL contended that the impugned order was passed without hearing the appellant, that therefore, there was total denial of natural justice to VETL, and consequently, the impugned order should be set aside and the case be remanded to BIFR for fresh consideration after hearing VETL. It is clear to us from the record of BIFR proceedings, the conclusions, whereof have been summarised in the preceding paragraph, that VETL was continuously heard at length by BIFR at all its earlier proceedings. The final order, dated 2.12.97 was passed by BIFR on the basis of the factual financial position, as evidenced by the audited balance sheet for the year 1995-96 submitted by VETL. Natural justice does not imply that oral hearing should be given on every occasion. Moreover, when the facts are not disputed and are specifically admitted, and there have been continuous oral hearings on earlier occasions and when an order is passed on the basis of admitted and undisputed facts, it cannot be said that the person who has submitted such facts has been denied natural justice. We, therefore, reject the contention of the learned counsel for the appellant. 

4. The learned counsel for appellant further argued that the rehabilitation scheme under section 17(2) of the Act is still under implementation, and that the case of VETL could not be de-registered by BIFR until that scheme is implemented or an alternative scheme is prepared by the OA, sanctioned by BIFR and fully implemented. In support of his arguments, he relied upon this Authority's decisions in the cases of M/s. Nirlon Limited (NL), M/s. Swan Mills Ltd. (SML) and M/s. Graham Firth Steel Production (I) Ltd. (GFSPL). He argued that so long as a scheme is under implementation, the case of a sick industrial company before BIFR cannot be de-registered, that, in the case of VETL, OA had been appointed under section 17(3) of the Act, and that it was incumbent upon BoI (AO) to prepare a scheme under section 18(1) of the Act for sanction by BIFR under section 18(4) of the Act. 

5. Our observations and conclusions on the contentions of the learned counsel for the appellant, referred to in the preceding paragraph, are given below : 

(a) The agreed rehabilitation package submitted by VETL, which was considered by BIFR on 9.7.90, cannot be treated as a scheme sanctioned under section 18(4) of the Act. It was only a rehabilitation plan, arrived at by mutual agreement amongst VETL and secured creditors, to give time to VETL for making its networth exceed the accumulated losses, as envisaged in section 17(2) of the Act. As and when the networth exceeds the accumulated losses, the purpose of such plan under section 17(2) of the Act is fulfilled, and there is no need for any further proceedings under the Act. 

(b) In the cases of NL (this Authority's order, dated 29.8.97 in Appeal No. 145/97), SML (this Authority's order, dated 9.7.96 in Appeal No. 77/96 and order, dated 19.6.97 in Appeal No. 70/97) and GFSPL (this Authority's order, dated 20.3.98 in Appeal No. 211/97), this Authority has followed the common ratio that after a scheme is sanctioned under section 18(4) of the Act, BIFR's jurisdiction to deal with the case continues until the scheme is fully/substantially implemented. In such cases, BIFR has to exercise its powers and discharge its functions under various sub-sections of section 18 of the Act in order to secure proper implementation of the scheme : BIFR has to monitor the implementation of the scheme, give appropriate orders for removal of difficulties in the implementation of the scheme, and sanction modified or fresh schemes, if necessary. After the implementation of the scheme has commenced, but substantial parts of the scheme remain to be implemented, the case cannot be de-registered on the sole ground that the networth of the company has exceeded the accumulated losses, because such de-registration would prevent BIFR from exercising its powers and discharging its functions under sub-sections (5), (9), (10) and (12) of section 18 of the Act. 

(c) In the present case, no scheme was sanctioned by BIFR under section 18(4) of the Act. Therefore, in the facts of the present case, the ratio followed by this Authority in the case of NL, SML and GFSPL is not attracted. 

(d) The essential prerequisites for the appointment of an OA under section 17(3) of the Act are : there should be a sick industrial company; it is not practicable for the sick industrial company to make its networth exceed the accumulated losses within a reasonable time; it is necessary or expedient to adopt all or any of the measures specified in section 18 of the Act in relation to such company. An order of BIFR appointing an OA under section 17(3) of the Act in respect of a sick industrial company, continues to survive if all these pre-requisites continue to exist. The order of appointment of an OA under section 17(3) of the Act cannot survive if one or more of those prerequisites disappear. In the present case, before a scheme could be prepared by BoI (OA) and sanctioned by BIFR under section 18(4) of the Act, the networth of VETL exceeded the accumulated losses by its own efforts and it ceased to be a sick industrial company within the meaning of section 3(1)(o) of the Act as on 31.3.96. Therefore, BIFR's order appointing BoI as OA under section 17(3) of the Act for preparing a scheme for VETL cannot survive. The contention of the learned counsel for VETL that BoI (OA) should have prepared a scheme for sanction by BIFR under section 18(4) of the Act, even though the networth of VETL had already exceeded its accumulated losses on 31.3.96, is not tenable. 

6. The learned counsel for VETL further contended that the audited accounts for the year 1995-96 are not the finalised audited accounts in the light of section 3(1)(da) of the Act because the said accounts have not yet been adopted by the AGM of VETL. He further argued that the accounts which have not been approved by the AGM of the company, cannot form the basis for BIFR's conclusion that the networth of VETL exceeded its accumulated losses on 31.3.96. In reply to a query from the Bench as to whether VETL challenges the audited accounts for the year 1995-96, the learned counsel for VETL replied in the negative. It is also relevant to refer to section 15 of the Act. A reference has to be made by the Board of directors of an industrial company, which has become a sick industrial company, within 60 days from the date of finalisation of the duly audited accounts for the financial year at the end of which the company has become a sick industrial company. However, proviso to section 15(1) of the Act stipulates that if the Board of directors has sufficient reasons even before such finalisation of the duly audited accounts of the company to form the opinion that the company has become a sick industrial company, the Board of directors shall, within 60 days after it has formed such opinion, make a reference to BIFR for the determination of the measures which shall be adopted with respect to the company. Therefore, a reference under section 15 of the Act can be made by a company to BIFR even before the duly audited accounts have been approved at the AGM of the company. Thus, the duly audited accounts, approved by the Board of directors of a company, can be relied upon for determining whether a company is a sick industrial company or not within the meaning of section 3(1)(o) of the Act, even though such accounts have not been approved at the AGM of the company. In the present case, the accounts of VETL for the financial year ending 31.3.96 were duly audited and approved by Board of directors. The correctness of the accounts is not disputed by VETL. The contention of the learned counsel for VETL that these accounts could not form the basis for BIFR's conclusion that VETL's networth exceeded its accumulated losses on 31.3.96 is, therefore, not tenable. 

7. The learned counsel for VETL further argued that IDBI has filed a suit for Rs. 23.84 lakhs against VETL, that it is shown as a contingent liability in the accounts of VETL, that BIFR should have considered the need for making a provision for such liability in the profit and loss account, that a provision for this liability in the profit and loss account would have resulted in a substantially altered financial position of VETL as on 31.3.96, and that BIFR's order passed without examination of this issue deserves to be set aside. In the facts of this case, this argument has no merit. It is seen from paragraph 5 of BIFR's proceedings, dated 9.10.97 that the learned counsel for VETL had stated before BIFR that IDBI's dues have been cleared by VETL and as such, their claim was denied. The management of a company has to make a provision, in respect of a contingent liability, to the extent to which the management perceives the devolution of such liability on the company. In the present case, IDBI's dues have been denied by VETL. Therefore, provision for the liability (if any) will have to be made in the profit and loss account for the financial year during which such liability actually devolves upon VETL as a result of the court's judgment. Moreover, the audited accounts of VETL for the year 1995-96 show that the networth of VETL exceeded the accumulated losses by Rs. 92,90,142 on 31.3.96. Therefore, even if VETL admitted its liability to IDBI, that would not have resulted in accumulated losses being equal to or more than the networth as on 31.3.96. Again, if on a subsequent date, the accumulated losses are equal to or exceed the networth on account of any contingent liability becoming an actual enforceable liability, that does not prevent VETL from approaching BIFR with a fresh reference under section 15(1) of the Act. Current proceedings under the Act cannot be sustained on the basis that a company may become a sick industrial company in future. 

8. The learned counsel for VETL further submitted that even though the dues of ICICI and Hong Kong Bank have been settled, and the dues of IDBI are disputed, VETL's account with BoI, which was regular, has become irregular and this fact should have been considered by BIFR. In our view, this contention has no force whatsoever because, for the purpose of determining whether a company is sick within the meaning of section 3(1)(o) of the Act or not, it is not material whether such company's accounts with any bank or financial institution are regular or not. The real test is whether the accumulated losses are equal to or more than the networth or not. In the present case, it is not disputed that the networth of VETL exceeded the accumulated losses on 31.3.96. 

9. The counsel for VETL further argued that VETL had never approached BIFR for being de-registered. In our view, this argument is without any force. If on the basis of facts, BIFR comes to the conclusion, before a scheme is sanctioned under section 18(4) of the Act, that the networth of a company, which was declared to be a sick industrial company in a reference under section 15 of the Act, has exceeded its accumulated losses at the end of any financial year after the registration of the reference under section 15 of the Act, BIFR has to de-register the case and drop all proceedings under the Act. Any contrary view would result in an untenable situation of industrial companies, which are not sick industrial companies, within the meaning of section 3(1)(o), enjoying protection under section 22(1) of the Act on the ground that a scheme is under preparation, which could never have been the purpose of this legislation enacted in public interest. 

10. We do not find any reason for interference in the impugned order. The appeal is dismissed.