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

AJAY K. JAIN, Advocate, with PRAVEEN GUPTA AND TARUN SUD, V. P. Finance, for the appellant. 

SUMANT BATRA, Advocate, DR. ARYA KUMAR, G.M., A. B. SAHA, A.G.M., for IIBI; INDERPAL S. KALRA, Dy. General Manager, IDBI; VIVEK KASTWAR, A.M. Legal, Gujarat Lease Financing Ltd.; J. M. SHARMA, Manager, PNB; ASHOK KUMAR, A.G.M., UTI; T. R. JAYASANKARAN, Manager, Indian Bank. 

ORDER 

This is an appeal against BIFR's order, dated 17.6.99 in case No. 35/97 regarding M/s Montari Industries Ltd. (MIL), a sick industrial company within the meaning of section 3(1)(o) of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA). 

2. The appellant is aggrieved by BIFR's directions contained in paragraph 20(a),(c) and (e) of the impugned order. 

3. Under an agreement, dated 1.12.94, IDBI lent a sum of Rs. 15 crore to MIL, repayable in 12 months within two instalments. By way of security, MIL pledged the following shares with IDBI : 17,10,090 shares of Bausch & Lomb Ltd. (BLL) belonging to MIL and its subsidiaries; 10,64,725 shares of BLL belonging to the promoters and their associates; 35,298 shares of M/s Ranbaxy Industries Ltd. belonging to promoters; 7,47,652 shares of MIL belonging to promoters and their associates. MIL defaulted in repayment of loan to IDBI. After protracted negotiations between IDBI and MIL, by a letter, dated 22.1.99, IDBI informed MIL, about its acceptance of OTS subject to the said amount being paid by 31.3.99. The OTS terms envisaged substantial relief in interest payable on the loan of Rs. 15 crore. IDBI, as the operating agency appointed by BIFR under section 17(3) of SICA, was also preparing a draft rehabilitation scheme (DRS) based on OTS of the dues of financial institutions/banks. By a letter, dated 12.2.99, IDBI approached BIFR for permission for the sale of shares pledged by MIL with OTS amounts. Permission was sought because by earlier order, dated 1.8.97, whereby BIFR declared MIL to be a sick industrial company, MIL had been restrained from alienating its assets under section 22A of SICA. By order, dated 5.3.99, BIFR permitted MIL to sell the shares as recommended by IDBI under their letter, dated 12.2.99 with the direction that the proceeds from the sale will be deposited with IDBI in separate account which will be utilised or spent as directed by BIFR after considering the requests from concerned parties on merit. IDBI addressed another letter, dated 9.3.99 to BIFR, requesting for amendment to their order, dated 5.3.99 and requesting that IDBI be allowed to appropriate the sale proceeds from the shares. BIFR passed a subsequent order, dated 30.3.99 after considering IDBI's application, permitting IDBI to retain lien on the sale proceeds of the shares subject to the provisions that may be made in the sanctioned scheme as to the final disposal of the sale proceeds. Thereafter, MIL obtained advance from Kotak Mahindra Capital Co., to be repaid from the sale proceeds of the shares arranged to be sold through Kotak Securities, and made payment of Rs. 2,201.48 lakhs to IDBI in full and final settlement of their OTS amount. In all, 17,10,090 shares of BLL (owned by MIL and its subsidiaries) and 10,64,725 shares of BLL (owned by promoters and their associates) were sold for a total consideration of Rs. 27.78 crore (rounded off). Apart from the payment to IDBI, MIL also paid an amount of Rs. 394.50 lakhs to ICICI in full and final settlement of their OTS amount, Rs. 173 lakhs to some pressing creditors against legal cases and utilised the balance Rs. 8.67 lakhs for its own working capital purposes. 

4 The DRS submitted by IDBI to BIFR was circulated by BIFR under their order, dated 1.4.99, inviting objections and suggestions as well as consent from the concerned persons under section 19(2) of SICA. The scheme envisaged a cost of of Rs. 36.85 crore to be financed by : Rs. 26.36 crore as sale proceeds of BLL shares owned by MIL and its subsidiaries and the promoters and their associates and pledged with IDBI : Rs.95 lakhs already paid to IDBI; Rs. 9.34 crore as internal accruals; Rs. 20 lakhs as additional interest-free fund to be brought in by the promoters. An amount of Rs. 31.11 crore was to be utilised in the first year of the scheme. This, inter alia, included payment to Rs. 28.29 crore (inclusive of Rs. 95 lakhs already paid to IDBI) as the OTS amount to IDBI/ICICI/IIBI/PSIDC, an amount of Rs. 2.00 crore as OTS payment to foreign banks and the balance Rs. 82 lakhs towards capital expenditure and working capital. As an amount of Rs. 95 lakhs had already been paid to the IDBI, the OTS amount required to be paid to the financial institutions in the first year was Rs. 27.34 crore. As against that, an amount of Rs. 25.96 crore was paid to IDBI and ICICI towards full payment of their OTS amounts. Therefore, the real grievance arises on the part of the IIBI and PSIDC who were to get the payment of the OTS amount in the very first year of the scheme. 

5. At the last hearing of this appeal on 1.12.99, the learned counsel for Mudra Ispat Ltd. had raised an objection stating that IDBI and ICICI had been given a preferential treatment and that neither BIFR nor OA had any power to divert payment to one person except under the sanctioned scheme. 

6. We do not find any merit in the contention of Mudra Ispat Ltd. for two reasons : Mudra Ispat Ltd. is an unsecured creditor and a provision for payments to unsecured creditor has already been made in the DRS, and as this unsecured creditor is represented before BIFR and can make submissions before BIFR as and when the scheme is considered, Mudra Ispat Ltd. has no locus standi for making an objection regarding payments to ICICI and IDBI because the DRS envisaged payment from the sale proceeds from the disposal of shares to the F/s. 

7. Mr. Sumant Batra, counsel for IIBI, states that on 1.8.97 BIFR had directed MIL not to alienate its assets, that this direction is meant to facilitate the rehabilitation of the sick industrial company by preventing dilution of assets and to ensure that sale proceeds from the disposal of assets are distributed amongst the creditors in a reasonable manner under the scheme sanctioned by BIFR. 

8. In the present case, we do not accept this contention of Mr. Batra, because BIFR's direction under section 22A of SICA is one of the general conditions or guidelines laid down by BIFR at the time of appointment of an operating agency under section 17(3) of SICA. Section 17(4)(b) of SICA authorises BIFR to modify its orders under section 17(3) of SICA on submissions being made by the OA. By their order, dated 30.3.99, permitting IDBI to hold lien on the sale proceeds from the disposal of shares pledged with IDBI, BIFR had modified its earlier order, its modification being valid by virtue of section 17(4)(b) of SICA, and therefore, neither the sale of the shares pledged with IDBI, nor the order permitting IDBI to retain its lien can be challenged belatedly. 

9. BIFR's order, dated 30.3.99 very clearly states that IDBI is permitted to retain she lien on the sale proceeds of the shares subject to the provisions that may be made in the sanctioned scheme as to the final disposal of the sale proceeds. This order superseded BIFR's earlier order, dated 5.3.99 whereby the sale proceeds were ordered to be kept in a separate account with IDBI. Once the lien of the IDBI is accepted, the sale proceeds in excess of the satisfaction of the IDBI's lien could only be available for disposal in accordance with the provisions to be made in the sanctioned scheme. It is seen from the facts of this case that the sale proceeds from the disposal of BLL shares owned by MIL and its subsidiaries were only Rs. 17 crore (round off); the remaining sale proceeds were realised from the disposal of BLL shares belonging to the promoters and their associates. Moreover, the DRS itself envisaged the utilisation of sale proceeds from the disposal of these shares for the purpose of OTS payments to the financial institutions. As no balance would have been available after the satisfaction of the IDBI's lien insofar as the sale proceeds of the shares belonging to MIL and its subsidiaries are concerned, it cannot be said that there was any violation of the proposed terms of the DRS or BIFR's order, dated 30.3.99. IDBI's lien could not have been removed or reduced without IDBI's consent because reduction in IDBI's lien on the sale proceeds would amount to financial assistance as defined under section 19(1) of SICA, and this could not have been done without IDBI's consent. Moreover, while the proceedings in relation to sick industrial company are in progress before BIFR, efforts for the reduction of the liabilities of the sick industrial company have to be encouraged and whenever possible, efforts have to be made to arrest the increase in the liabilities. Again, in this case, IIBI and PSIDC are secured by charge on fixed assets and did not have any lien on BLL shares pledged with IDBI, whereas IDBI had no charge on the fixed assets of MIL. From that point of view, the OTS payments to IDBI and ICICI cannot be considered illegal or unreasonable. 

10. However, IIBI and PSIDC have a reasonable grievance, because they expected to share the sale proceeds from the sale of shares. We have, therefore, looked at the possibility of finding out a solution to the claims of the IIBI and PSIDC. PSIDC is not present today and was not present on 1.12.1999 when the appeal was part heard. Therefore, the PSIDC would be free to make its submissions before BIFR as and when DRS is considered. As regards IIBI, Shri A. K. Jain, learned counsel for MIL, and Mr. Sumant Batra, learned counsel of IIBI, on instructions from their respective clients, have agreed before us that MIL will pledge all the unencumbered MIL shares (stated to be about 6 to 7 lakhs) belonging to promoters and associates with IIBI and make payment of the agreed OTS amount with interest to IIBI in accordance with the terms Of MIL's letter, dated 25.11.99, a copy of which has been placed before us today (OTS amount is to be paid with interest @ 19.5% p.a. which has been agreed to between IL and IIBI), with the stipulation that if the entire OTS amount alongwith interest is not paid by 31.3.2000, IIBI will be free to recall the sacrifices made by it and institute/ continue legal proceedings against MIL/guarantors for the recovery of its entire dues and execute the decree that it may obtain. We order accordingly. 

11. IIBI (OA) will modify the DRS, after deleting IDBI and ICICI whose dues have already been settled and paid, and submit a modified DRS to BIFR within a month, With copies to the concerned parties. In the write up of the modified DRS, the above arrangement between MIL and IIBI will be incorporated. The arrangement made for the payment of the dues of IIBI as stated in the proceeding paragraph will not be subject to any modification by the provisions of the scheme that may be sanctioned by BIFR. 

12. The appeal is allowed. BIFR's directions in paragraph 20(a) and (e) of the impugned order are set aside. Reference to the deposit in a no lien account in paragraph 20(c) of the impugned order is set aside. BIFR shall consider the modified DRS to be submitted by IDBI after hearing the concerned parties and proceed further according to law.