Prima Industries Ltd. vs Dy. Commissioner (Appeals) and Others

P.R. Raman, J.—The above writ appeals came before us on a reference made by a Division Bench of this Court on 21-10-2005 in W.A. 1892/2005. But we do not propose to dispose of the individual appeals on merits since we do not think it is necessary to go into the factual details for answering the issue referred. However, for the purpose of answering the reference we shall refer to the essential facts stated in W.A. 1892/2005.

The Appellant M/s Prima Industries Ltd. was served with a letter dated 31-1-2005 by me BIFR stating that their application dated 8-12-2004 has already been received and that the same stands registered as Case No. 36/2005. Further proceedings are still pending before the BIFR. It is contended by the Petitioner that since the enquiry contemplated u/s 16 of the Sick Industrial Companies (Special Provisions) Act, 1985, (the Act for short) having commenced as soon as the registration of the reference is completed after scrutiny and hence by operation of Section 22 of the said Act, further action against the Company''s assets must be stayed till a final decision is taken by the BIFR. In support of the same, reliance was placed on the decision of the apex court in Real Value Appliances Ltd. Vs. Canara Bank and Others, . which was subsequently followed in the later decision of the apex court in Rishabh Agro Industries Ltd. v. P.N.B. Capital Services Ltd. (2005) 5 S.C.C. 515 However in Anr. decision of the apex Court in Dy. Commercial Tax Officer v. Corromandal Pharmaceuticals. A.I.R 1997 S.C 2007 while considering the scope of Section 22 of the Act, it was held as follows:

The language of Section 22 of the Act is certainly wide. But, in the totality of the circumstances, the safeguard is only against the impediment that is likely to be caused in the implementation of the scheme. If that be so, only the liability or amounts covered by the scheme will be taken in by Section 22 of the Act. So, we are of the view that though the language of Section 22 is of wide import regarding suspension of legal proceedings from the moment an inquiry is started, till after the implementation of the scheme or the disposal of an appeal u/s 25 of the Act it will be reasonable to hold that the bar or embargo envisaged in Section 22(1) of the Act can apply only to such of those dues reckoned or included in the sanctioned scheme.

This decision was followed by this Court in The Aluminium Industries Ltd. v. State of Kerala 2005 (1) K.L.J. 424. When the matter came up for consideration before the Division Bench, it opined that there is some conflict in the reasoning adopted by the Supreme Court in Corromondal Pharmaceuticals''s case and Real Value Appliances''s case and hence the matter was referred to a Larger Bench. Before we refer to the various decisions of the apex court interpreting the scope of Section 22 of the Act, we shall refer to the scheme of the Act for a better appreciation of the issue on hand.

The Sick Industrial Companies (Special Provisions) Act, is an Act made by the Parliament, the preamble of which states that the Act was for the purpose of making, in the public interest, special provision with a view to securing timely detection of sick and potentially sick companies owning industrial undertakings, the speedy determination by a Board of experts of the preventive, ameliorative, remedial and other measures which need to be taken with respect to such companies and the expeditious enforcement of the measures so determined and for matters connected therewith or incidental thereto.

Section 3(o) defines the term "sick industrial company" as follows:

''sick industrial company'' means an industrial company (being a company registered for not less than five years) which has at the end of any financial year accumulated losses equal to or exceeding its entire net worth.

As per the explanation followed thereunder, it is declared that industrial company existing immediately before the commencement of the Sick Industrial Companies (Special Provisions) Amendment Act, 1993, registered for not less than five years and having at the end of any financial year accumulated losses equal to or exceeding its entire net worth, shall be deemed to be a sick industrial company. Chapter 3 of the Act deals with "Reference, Inquiries and Schemes". As per Section 15 of the Act, when an industrial company has become a sick industrial company, the Board of Directors of the company, shall, within sixty days from the date of finalization of the duly audited accounts of the company for the financial year as at the end of which the company has become a sick industrial company, make a reference to the Board for determination of the measures which shall be adopted with respect to the company. The remaining part of the Section, however, has no relevance in the context of the present case. Sub-sections (1), (2) and (3) of Section 16 which are relevant may usefully be reproduced as follows:

(1) The Board may make such inquiry as it may deem fit for determining whether any industrial company has become a sick industrial company:

(a) upon receipt of a reference with respect to such company u/s 15; or

(b) upon information received with respect to such company or upon its own knowledge as to the financial condition of the company.

(2) The Board may, if it deems necessary or expedient so to do for the expeditious disposal of an inquiry under Sub-section (1), require by order any operating agency to enquire into and make a report with respect to such matters as may be specified in the order.

(3) The Board or, as the case may be, the operating agency shall complete its inquiry as expeditiously as possible and endeavor shall be made to complete the inquiry within sixty days from the commencement of the inquiry. (Explanation: For the purposes of this Sub-section, an inquiry shall be deemed to have commenced upon the receipt by the Board of any reference or information or upon its own knowledge reduced to writing by the Board).

Sub-section (4) provides that the Board, if it deems fit to make an inquiry or to cause an inquiry to be made into any industrial company under Sub-section (1) or as the case may be, under Sub-section (2), it may appoint one or more persons to be a special director or special directors of the company for safeguarding the financial and other interests of the company or in the public interest. The Board is also authorised to issue directions to a special director appointed under Sub-section (4) as it may deem necessary or expedient for proper discharge of his duties, as per Sub-section (4A). The remaining part of the Section, however, is not relevant to be stated here. Section 17 empowers the Board to make suitable orders on completion of the inquiry and as per Sub-section (1) of this Section, if after making an inquiry u/s 16, the Board is satisfied that a company has become a sick industrial company, the Board shall, after considering all the relevant facts and circumstances of the case, decide, as soon as may be, any order in writing whether it is practicable for the company to make its net worth exceed the accumulated losses within a reasonable time. As per Sub-section (2) of Section 17, if the Board decides under Sub-section (1) that it is practicable for a sick industrial company to make its net worth exceed the accumulated losses within a reasonable time, the Board shall, by order in writing and subject to such restrictions or conditions as may be specified in the order, give such time to the company as it may deem fit to make its net worth exceed the accumulated losses. Sub-section (3) of Section 17 provides for adoption of all or any of the measures specified in Section 18 in relation to the said company, it may, as soon as may be, by order in writing, direct any operating agency specified in the order to prepare, having regard to such guidelines as may be specified in the order, a scheme providing for such measures in relation to such company. Sub-section (4) provides the power to review such order or reference in that behalf from any agency referred to in Sub-section (2) of Section 15 or on its own motion and pass a fresh order in respect of such company under Sub-section (3) if any of the restrictions or conditions specified in an order made under Sub-section (2) are not complied with by the company concerned.

Section 18 provides for preparation and sanction of schemes. It provides that the operating agency specified in the order shall prepare, a scheme, where an order is made under Sub-section (3) of Section 17 in relation to any sick industrial company, which scheme has to be prepared ordinarily within a period of 90 days. It further says that the scheme with respect to such company may provide for any one or more of the measures mentioned in the clauses mentioned thereunder. Section 19A provides for arrangement for continuing operations etc. during inquiry u/s 16. As per Section 20(1) of the Act, the Board may, in case it is found after enquiry u/s 16 and is of the opinion that the sick industrial company is not likely to make its net worth exceed the accumulated losses within a reasonable time while meeting all its financial obligations and that the company as a result there of is not likely to become viable in future and that it is just and equitable that the company should be wound up, it may record and forward its opinion to the concerned High Court.

On a plain reading of the various provisions as above, it can be seen that when the industrial company becomes a sick industrial company, the Board of Directors of the Company would make a reference to the Board for determination of the measures which shall be adopted with respect to the company and on making such a reference the BIFR makes an inquiry as it may deem fit for determining whether the industrial company has become a sick industrial company as contemplated u/s 16 and after following the procedure laid down it makes an order of completion of such inquiry as authorised by Section 17 of the Act. Section 18 provides for preparation and sanction of the scheme.

Now, we come to Section 22 which provides for suspension of legal proceedings, contracts etc. The relevant portion of the said Section is extracted hereunder:

(1) Where in respect of an industrial company, an inquiry u/s 16 is pending or any scheme referred to u/s 17 is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal u/s 25 relating to an industrial company is pending, then, notwithstanding anything contained in the Companies Act, 1956, or any other law or the memorandum and articles of association of the industrial company or any other instrument having effect under the said Act or other law, no proceedings for the winding up of the industrial company or for execution, distress or the like against any of the properties of the industrial company or for the appointment of a receiver in respect thereof and no suit for the recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans or advance granted to the industrial company shall lie or be proceeded with further, except with the consent of the Board or, as the case may be, the appellate authority.

On a plain reading of Section 22 as it is widely couched in its language, operates as a bar for taking any proceedings for winding up of the industrial company or for execution, distress or the like against any of the properties of a company or for appointment of a receiver in respect thereof or to institute any suit for recovery of the money or for enforcement of any security against the industrial company or of any guarantee in respect of any loans or advance granted to the industrial company, except with the consent of the Board or as the case may be, the appellate authority, where in respect of an industrial company, an inquiry u/s 16 is pending or any scheme referred to u/s 17 is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal u/s 25 relating to an industrial company is pending. The bar operates notwithstanding anything contained in the Companies Act, 1956, or any other law or the memorandum and articles of association of the industrial company or any other instrument having effect under the said Act or other law. Thus, not only when any scheme as referred to u/s 17 is under preparation or consideration or any such scheme is under implementation, but also when an inquiry itself is pending u/s 16, operation of Section 22 comes into play.

In Real Value Appliances Ltd. Vs. Canara Bank and Others, one of the points which arose for consideration was as to whether a mere registration of a reference by the BIFR under the Act, would result in the automatic cessation of all proceedings which are pending either in the civil courts or in the Company Court etc. as against its assets. It was contended that in order that Section 22 of the Act can come into operation, the BIFR must, subsequent to the registration of the reference u/s 15, apply its mind and consider it necessary u/s 16 to make an inquiry and issue notices on the reference to the affected parties who are required to be heard and then only it can be said that an inquiry is pending and unless an inquiry is pending there cannot be a statutory stay of proceedings etc. as contemplated by Section 22(1) of the Act After referring to the provisions contained in Sections 16 and 22 the apex court held as follows:

It is to be noticed that according to Section 22, in case an ''inquiry u/s 16'' is pending, then, notwithstanding anything in the Companies Act or any other instrument etc. no proceedings for the winding up of the company or for execution or distress or the like against the property of the company or for the appointment of a receiver and no suit for recovery of money or enforcement of any security or of any guarantee shall lie or be proceeded with further, except with the consent of the Board or, as the case may be, by the appellate authority. Section 22A permits the Board to pass certain conditional orders.

A reference was made to the observation made in some of the judgments of High Courts based on the use of the word "may" in Section 16(1) of the Act that the word "may" in that Section shows that the BIFR has power to reject a reference summarily without going into merits and that it is only when the BIFR takes up u/s 16(1) that it can be said that the "inquiry" as contemplated by the Section has commenced. The apex court found no merit in the said contention and it was held as follows:

Therefore, in our view, the High Court of Allahabad in Industrial Finance Corporation of India and Another Vs. Maharashtra Steel Ltd. and Others, ., the High Court of Andhra Pradesh in Sponge Iron India Ltd. Vs. Neelima Steels Ltd., , the High Court of Himachal Pradesh in Orissa Sponge Iron Ltd. v. Rishab Ispatt Ltd. (1993) 78 Comp. Cas 264 (HP) are right in rejecting such a contention and in holding that the inquiry must be treated as having commenced as soon as the registration of the reference is completed after scrutiny and that from that time, action against the Company''s assets must remain stayed as stated in Section 22 till final decisions are taken by the BIFR.

(emphasis supplied)

It was further held in para 24 that the other view that mere registration does not amount to "commencement of inquiry u/s 16(1)" for the purposes of Section 22(1) has been taken by the Calcutta High Court in Bengal Lamps Limited Vs. Furmanite Nicco Limited, and by the Rajasthan High Court in Maruti Udhyog Ltd. Vs. Instrumentation Ltd., and this view is mainly based upon the provisions of the Regulations made under the Act. After referring to the relevant provisions contained in the Regulation, it was concluded in para 30 of the judgment as follows:

There can, therefore, be no difficulty in holding that after the amendment to Regulation 19 w.e.f. 24-3-1994, once the reference is registered and when once it is mandatory simultaneously to call for information/documents from the informant and such a direction is given, then inquiry u/s 16(1) must--for the purposes of Section 22--be deemed to have commenced. Section 22 and the prohibitions contained in it shall immediately come into play. In that view of the matter, we need not go into the correctness of the view expressed by the Calcutta, Rajasthan and Bombay High Courts which relied upon the unamended Regulation 19. Point 2 is decided accordingly.

(emphasis supplied)

Thus, the legal position has been made clear beyond any pale of doubt that when a reference is made to the Board as contemplated u/s 15 and the same is registered, by virtue of the explanation to Sub-section (3) of Section 16, there cannot be any doubt that the inquiry shall be deemed to have commenced upon the receipt, by the Board, of any reference or information or upon its own knowledge reduced to writing by the Board. Once an inquiry has thus commenced, Section 22 comes into play and operates as a bar for taking any further legal proceeding against the industrial company. The decision of the apex court in Real Value Appliances Ltd.�s case was followed in the subsequent decision in M/s. Rishabh Agro Industries Ltd. Vs. P.N.B. Capital Services Ltd., . It was held by the apex court that the object of the Act is to afford maximum protection of employment, optimize the use of financial resources, salvaging the assets of production, realising the amounts due to the banks and to replace the existing time-consuming and inadequate machinery by efficient machinery for expeditious determination by a body of experts to safeguard the economy of the country and protect viably sick units. In view of Sections 15, 16 and explanation to Section 16(3) (as inserted by Act 12 of 1994) from the date of submission of reference u/s 15, an inquiry shall be deemed to have been commenced for the purpose of Section 22 of the Act. Further, in para 9 it was also held that it is true that for invoking the applicability of Section 22 it has to be established that an inquiry u/s 16 is pending or any scheme referred to u/s 17 is under preparation or sanctioned scheme is under implementation or an appeal u/s 25 to an industrial company is pending. But it cannot be said that despite the existence of any of the aforesaid exigencies the provision of Section 22 would not be attracted after the order of winding up of the company is passed.

Now we will come to the decision in Deputy Commercial Tax Officer and Others Vs. Corromandal Pharmaceuticals and Others, From the facts mentioned, it can be seen that it was a case where the industrial company--Corromandal Pharmaceuticals--was declared as a sick industrial company under the provisions of the Act by the Board for Industrial and Financial Reconstruction (BIFR). An operating agency was appointed and thereafter a scheme was also sanctioned for the rehabilitation of the said company, after obtaining the consent of the concerned financial institution. The scheme was brought into force immediately. The said scheme was modified later on 29-12-1993 and the same was under implementation. At that point, the sales tax arrears for the years 1992-93 and 1993-94 were sought to be recovered. It may be noticed that assessment orders for the said two years were passed only in 1994 and 95 respectively, long after the scheme was sanctioned by the BIFR, on 19-11-1990. The question arose for consideration was as to whether the said debt which became due long after the scheme, which did not fall as on the scheme date, could still be held to be barred by Section 22 of the Act. On the above said facts, the apex court held as follows:

...So we are of the view that though the language of Section 22 of the Act is of wide import regarding suspension of legal proceedings from the moment an inquiry is started, till after the implementation of the scheme or the disposal of an appeal u/s 25 of the Act, it will be reasonable to hold that the bar or embargo envisaged in Section 22(1) of the Act can apply only to such of those dues reckoned or included in the sanctioned scheme. Such amounts like sales tax, etc., which the sick industrial company is enabled to collect after the date of the sanctioned scheme legitimately belonging to the Revenue, cannot be and could not have been intended to be covered within Section 22 of the Act.

(emphasis supplied)

It can thus be seen that the apex court was considering a case where a scheme was already prepared and was being implemented. The debt sought to be recovered in the above case was long after the scheme was framed and therefore, Section 22 did not come into play. It was not a case pertaining to an inquiry stage u/s 16. Rather was it a case as contemplated u/s 17 of the Act. This decision cannot be taken as a law within the meaning of Article 141 of the Constitution of India as respects the scope and application of Section 22 of the Act is concerned, to an exigency where an inquiry u/s 16 is pending, whereas in the case of Real Value Appliances Ltd''s case which was followed in Rishab Agro Industries'' case it was decided that Section 22 comes into play both when an inquiry u/s 16 is pending or a scheme u/s 17 is to be finalized. As we have already noticed, Section 22 takes in both an inquiry u/s 16 as well as a scheme u/s 17 within its ambit. Therefore, we find no conflict between the two decisions. The bar u/s 22 operates the moment the inquiry starts u/s 16 when a reference is made by the Board to the BIFR and after following the procedure u/s 16 when a scheme made u/s 17 is implemented, the bar will be confined to the scheme debt.

We shall now refer to some of the other decisions of the apex court relating to the interpretation and scope of Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985. In The Gram Panchayat and another Vs. Shree Vallabh Glass Works Ltd. and others, the apex court was considering a SLP seeking leave to appeal against the decision of the Bombay High Court which quashed the proceedings for recovery of the dues due from the first Respondent--company. The Grama Panchayat initiated action for recovery of property tax and other dues from the company by taking coercive steps u/s 129 of the Bombay Village Panchayat Act, 1959. The said proceedings were challenged before the High Court by way of a writ petition under Article 226 of the Constitution of India, claiming protection u/s 22 of the Act. The High Court allowed the writ petition and quashed the proceedings. After referring to the relevant provisions of the Act, the apex court observed thus:

Section 22(1) provides that in case the enquiry u/s 16 is pending or any scheme referred to u/s 17 is under preparation or consideration by the Board or any appeal u/s 25 is pending then certain proceedings against the sick industrial company are to be suspended or presumed to be suspended. The nature of the proceedings which are automatically suspended are (1) Winding up of the industrial company; (2) Proceedings for execution, distress or the like against the properties of sick industrial company, and (3) Proceedings for the appointment of receiver. The proceedings in respect of these matters could, however, be continued against the sick industrial company with the consent or approval of the Board or of the appellate authority as the case may be.

Section 16 authorises the Board to make such inquiry as it may deem fit for determining whether any industrial company has become a sick industrial company. Where Board is satisfied that a company has become a sick industrial company, it could give a reasonable time to the company to make its net worth positive [Section 17(2)].Where it is not practicable for sick industrial company to make its net worth positive within a reasonable time, Section 17(3) steps in authorising the Board to direct any operating agency to prepare a scheme in relation to the company. The Board may specify the various measures to be considered by the operating agency. These measures are detailed out in Section 18. The operating agency has to prepare a scheme as per the order specified by the Board.

Taking note of the various steps taken by the Board, the apex court in para 10 held thus:

In the light of the steps taken by the Board under Sections 16 and 17 of the Act, no proceedings for execution, distress or the like proceedings against any of the properties of the company shall lie or be proceeded further except with the consent of the Board. Indeed there would be automatic suspension of such proceedings against the companies properties.As soon as the inquiry u/s 16 is ordered by the Board, the various proceedings set out under Sub-section (1) of Section 22 would be deemed to have been suspended.

(emphasis supplied)

In Maharashtra Tubes Ltd. Vs. State Industrial and Investment Corporation of Maharashtra Ltd. and Another, it was held thus:

The purpose and object of suspension of proceedings etc. u/s 22(1) of the 1985 Act is to await the outcome of the reference made to the BIFR for the revival and rehabilitation of the sick industrial company.The words ''or the like ''which follow the words ''execution'' and ''distress'' are clearly intended to convey that the properties of the sick industrial company shall not be made the subject-matter of coercive action of similar quality and characteristic till the BIFR finally disposes of the reference made u/s 15 of the 1985 Act. The legislature has advisedly used an omnibus expression ''the like'' as it could not have conceived of all possible coercive measures that may be taken against a sick undertaking.

(emphasis supplied)

It was also observed that ''if the Corporation is permitted to resort to the provision of Section 29 of the 1951 Act while proceedings under Sections 15 - 19 of the 1985 Act are pending it will render the entire process nugatory. In such a situation the law merely expects the corporation and for that matter any other creditor to obtain the consent of the BIFR or, as the case may be, the appellate authority to proceed against the industrial concern. The expression ''proceedings'' in Section 22(1) must be widely construed. It cannot be confined to legal proceedings understood in the narrow sense of proceedings in a court of law or a legal tribunal for attachment and sale of the debtor''s property, notwithstanding the use of that expression in the marginal note''.

In Tata Davy Ltd. Vs. State of Orissa and Others, the Appellant Company was declared as a sick company within the meaning of the Sick Industrial Companies (Special Provisions) Act, 1985, on 9th February 1988. A reference was made u/s 15 of the Central Act on 23-12-1989. Inquiry u/s 16 was made and a scheme was also sanctioned by the BIFR for the Appellant''s benefit which was at the relevant time under implementation. For the assessment years 1983-84 and 1984-85 the Appellant was in arrears of sales tax under the Orissa Sales Tax Act, 1947 recovery of which was sought to be made by attachment of its property under the provisions of Section 13A of the State Act. The question arose as to whether the provisions of Section 22(1) of the Central Act overrode the provisions of Section 13A of the State Act. The High Court of Orissa held that there was no irreconcilable conflict between the two provisions as they operated in. separate and distinct fields and therefore, both were capable of being obeyed. The result was that Section 22(1) of the Central act "would not protect the properties of industrial companies from being proceeded against in exercise of the power u/s 13A of the State Act".

The decision in The Gram Panchayat and another Vs. Shree Vallabh Glass Works Ltd. and others, to which reference is made in the foregoing paragraph was subsequent to the High Court decision. The apex court after referring to Section 22(1) of the Act and after making a reference of the decision in Deputy Commercial Tax Officer and Others Vs. Corromandal Pharmaceuticals and Others, held in para 11 as follows:

The Vallabh Glass Works judgment covers these appeals. Arrears of taxes and the, like due from sick industrial companies that satisfy the conditions set out in Section 22(1) of the Central Act cannot be recovered by coercive process unless the said Board gives its consent thereto.

It was further held that "in the larger interest of the industrial health of the nation, Section 22 of the Central Act requires all creditors seeking to recover their dues from sick industrial companies in respect of whom an inquiry u/s 16 is pending or a scheme is under preparation or consideration or has been sanctioned to obtain the consent of the said Board to such recovery. If such consent is not secured and the recovery is deferred, the creditor''s remedy is protected, for the period of deferment is, by reason of Sub-section (5) of Section 22, excluded in the computation of the period of limitation". After referring to the Corromandal Pharmaceuticals'' case, the apex court also held in para 13 as follows:

The Corromandal Pharmaceuticals judgment dealt with a sick industrial company which was enabled to collect amounts like sales tax after the date of the sanctioned scheme.This Court said "such amounts like sales tax, etc. which the sick industrial company is enabled to collect after the date of the sanctioned scheme, legitimately belonging to the Revenue, cannot be and could not have been intended to be covered within Section 22 of the Act. It added that the issue that had been arisen before it had not arisen in the case of Vallabh Glass Works. It did not appear therefrom or from any other decision of this Court or of the High Courts that in any one of them, the liability of the sick company dealt with therein itself arose for the first time after the date of sanctioned scheme. At any rate, in none of these cases a situation arose whereby the sick industrial unit was enabled to collect tax due to the Revenue from the customers after the sanctioned scheme but the sick unit simply folded its hands and declined to pay it over to the Revenue, for which proceedings for recovery had to be taken.

(emphasis supplied)

The apex court, therefore, held that clearly the facts of the Corromandal Pharmaceuticals'' case differ from the facts of Shree Vallabh Glass Works'' case and in the case of Tata Davy Ltd.�s case.

From the foregoing discussions, we hold that once the case is registered by the BIFR and the inquiry commenced the bar u/s 22 comes in to play. When subsequently a scheme is framed u/s 17 of the act, then the bar u/s 22 will be confined to the Scheme debt alone.

The reference having been answered thus the Registry will list the cases before appropriate Bench for final disposal.