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PETITIONER:

M/S S.R.F. LIMITED

Vs.

RESPONDENT:

M/S GARWARE PLASTICS AND POLYESTERS LTD. AND ORS.

DATE OF JUDGMENT07/03/1995

BENCH:

RAMASWAMY, K.

BENCH:

RAMASWAMY, K.

VENKATACHALA N. (J)

CITATION:

1995 AIR 2228 1995 SCC (3) 465

JT 1995 (3) 11 1995 SCALE (2)187

ACT:

HEADNOTE:

JUDGMENT:

K. RAMASWAMY, J.:

1. Leave granted.

2. These appeals By special leave arise from the judgment

and order of the Division Bench of the Delhi High Court

made in Civil Writ Petition No. 1493/94 dated August 8,

1994. The appellants are respondent No.3 and respondent No.

4- M/s Flowmore Polyesters Ltd, (for short, 'Flowmore') in

the writ petition and 3rd appellant-B.P. Mittal is a share-

holder. Flowmore was closed from August 1990. Pursuant to

a reference made by its Board of Directors under Sub-s.(1)

of s. 15 of the Sick Industrial Companies (Special Provi-

sions) Act, 1985, (for short, 'SICA') Flowmore was declared

a sick industrial company (for short, 'sick company') by the

Board for Industrial and Financial Reconstruction (for

short, 'BEFR') by order dated December 6, 1991. By an order

made under s. 17(3) of SICA, the IFCI was appointed as

operating agency (for short, 'OA') to prepare a financial

package to revive Flowmore with a cut off date as 30.9.92.

By clause (3) thereof, OA was directed to examine the

feasibility of amalgamation of Flowmore with other "healthy

companies or change of management of the company on stand

alone basis" and directed to submit its report by July 30,

1992, The OA invited offers from the parties evincing

interest in the revival of Flowmore and requested to submit

their revival proposals before May 15, 1992. The first

appellant (for short, 'SRF'), the first respondent (for

short, 'Garware') and Assam Asbestos Limited (for short

'AAL') submitted their respective schemes. The schemes

submitted on 15.7.92 (after seeking three extensions) by

Garware and AAL were on 'Stand Alone' basis while the one

submitted by SRF was for "merger" of Flowmore with SRF.

Despite the BIFR sending notices to all parties including

Garware intimating that they would be heard on their

respective schemes on October 5, 1992 and of receipt of such

notices by them, Garware did not appear. SRF and AAL being

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represented through their agents were heard. On October 5,

1992, BIFR gave further time to SRF and

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AAL and all other bidders to submit their final offers along

-with their revival proposals to the OA by November 7, 1992

so as to enable it to submit its report by October 13, 1992.

OA had stated at the hearing that SRF, Garware and AAL had

already undertaken techno-economic viability study of

Flowmore prior to the receipt of the proposals and "the

consensus at the joint meeting of the banks and the in-

stitutions was that only the proposal of NV s SRF Ltd. based

on merger of the unit with SRF was acceptable". The BIFR

passed an order stating in para 10 therein that the

representatives of AAL shall submit by October 15, 1992 to

the Bench and OA with a copy thereof to the banks and the

institutions, the detailed proposals for rehabilitation of

the company indicating the source of their technology and

the expenditure involved therein. The OA was further

directed to give detailed right-up on technology proposed to

be utilised for manufacture of various products, breakup of

processing features, dues etc. All the proposals for

revival of the unit if found unviable, the OA was required

to explore the possibility of change of management. The

copy of the order even though was sent to Garware, it did

not file any revised scheme with OA or review application to

the Board as to why its earlier proposal should not have

been rejected. By proceedings dated October 19, 1992, BIFR,

at the request of AAL, granted extension of time for

submitting revised proposals to the OA up. to November 7,

1992. It was further stated that "no further extension of

time will be granted". Even this order was communicated to

the Garware but it did not submit any revised scheme to the

OA by November 7, 1992. BIFR sent notice on the report

submitted by the OA on November 5, 1992, to all parties

including Garware intimating that it would hear the matter

on December 11, 1992 and Annexure-B is the copy of the

notice sent to all. On November 30, 1992, OA submitted its

evaluation report as directed by BIFR on the revival

proposal submitted by SRF and AAL. On December 3, 1992,

Garware by its letter addressed to AAL offered its technical

assistance to AAL for revival of Flowmore. On December 8,

1992, the OA submitted its report to BIFR along with minutes

of the joint meeting it had held with banks and financial

institutions. It would, therefore, be apparent that instead

of submitting its revised proposal to the OA or BIFR,

Garware had agreed with AAL to assist it for revival of

Flowmore. At the time of hearing by BIFR, on December 11,

1992, the AAL had referred to and BIFR had taken note of the

letter of Garware dated December 3, 1992, in which Garware

had undertaken to assist AAL for the revival of Flowmore on

stand alone basis, as is evident from para 3 of the

proceedings at page 130 of the paper book. Although time

and again, Garware was given repeated opportunities to sub-

mit its revised scheme for revival of Flowmore on stand

alone basis, it had chosen to stand out from BIFR and had

contracted with AAL to give its technical know-how

assistance to AAL for consideration for revival of Flowmore.

3. On December 11, 1992, BIFR had considered the proposals

of SRF and AAL. At this juncture, it may be relevant to

note that one ATCO, a U.S. based company, also represented

to assist AAL and appeared before the Board which was di-

rected to deposit by December 1992 an amount of one million

U.S. dollars in a 'No Lien Account' with the Lead Bank, the

State Bank of Saurashtra, and latter

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was directed to communicate, by December 21, 1992, to the OA

with a copy marked to the BIFR whether ATCO had deposited

the amount with them or not. AAL and ATCO were directed to

submit by December 28, 1992 the revised proposal with the OA

marking a copy to BIFR, besides making available any other

information required by OA after adopting cut off date of

30th September 1992. SRF was also directed to submit its

modified revival proposal within the aforesaid period. The

BIFR thereafter in the final order directed to submit to it

by January 18, 1993 a revival report of SRF and AAL by

January 18, 1993 along with minutes of its joint meeting

with Banks and financial institutions. It had also ordered

that "no request for extension of time either for deposit of

fund or for submission of proposal shall be entertained in

any case" and that it would hear the case as soon as OA

submitted its report. On January 13, 1993, the OA submitted

its report. Again on February 15, 1993, BIFR had sent no-

tice to all parties including Garware intimating that it

would hear the matter on March 18, 1993, (Annex-C is the

notice). On March 18, 1993, Garware did not appear before

the BIFR. BIFR noted that two schemes submitted by SRF and

AAL were being considered. After hearing the parties, SRF,

AAL/ATCO and Flowmore, the order was reserved. By this

stage, ATCO had backed out from its earlier proposal and it

did not deposit the amount as directed in the earlier

proceedings. It would, thus, be clear that after submitting

its revival proposal on stand alone basis, despite repeated

directions and notices, Garware neither complied with the

directions of the BIFR for modification of its original

scheme as per the R-BI guidelines for evinced any further

interest in the matter of revival of the sick company on

stand alone basis nor did it participate in any of the

proceedings before BIFR.

4. By order dated April 23, 1993, BIFR approved the scheme

of revival of Flowmore proposed by SRF with the observation

that "However, its main and substantial demerit is that it

envisages much larger sacrifices from financial institutions

banks apart from a huge tax-shield of Rs. 10. 17 crores at

the cost of the Central Exchequer under Section 72-A of the

Income Tax Act, which makes the proposal, in comparison with

that of AAL too expensive an alternative for the revival of

the sick company. The large stream of gross profits of

nearly Rs.73 crores over a period of first seven years, in

the context of which a further gain of Rs. 10. 17 crores

under Section 72-A would be wholly unwarranted. " The SRF

in its letter dated March 23, 1993 and April 16, 1993 filed

before BIFR expressly had given up s.72A benefits,

Therefore, by petition dated May 4, 1993, SRF sought review

of the order dated April 23, 1993 pointing out its

undertaking in the aforesaid two letters and requested the

Board to modify the order and approve the merger scheme. By

order dated November 1993, BIFR had rectified the mistake.

5. Before it was done, SRF filed an appeal before the

Appellate Authority for Industrial and Financial

Reconstruction (for short, 'Appellate Authority'). On May

1993, the Appellate Authority dismissed the appeal on the

ground that order dated April 23, 1993 was only an interim

order. By a joint meeting held on June 10, 1993, the banks

and financial institutions including OA agreed for the

merger proposal submitted by SRF as "most appropriate"

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and they recommended to the BIFR accordingly by its report.

ATCO also file an appeal before the Appellate Authority. On

September 7, 1993, the Chief Office of the ATCO stated that

ATCO was not willing to invest any money in the Flowmore.

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So the appeal was dismissed. ATCO then filed a writ

petition in the High Court of Allahabad which was also dis-

missed as withdrawn on October 27, 1993.

6. As stated earlier, by proceedings dated November 1993,

BIFR had rectified the mistake it had committed and accepted

rehabilitation-cum-merger scheme of SRF and directed

circulation and publication of the draft schemes and fixed

January 27, 1994 for hearing of the objections or sug-

gestions to the scheme. The copy thereof was also sent to

Garware - Annex-D. On January 14, 1994 Garware filed the

appeal before the Appellate Authority against the order

dated November 19, 1993 and on January 21, 1994 and after

hearing the arguments of all concerned, order was reserved.

Before it pronounced the order, Garware filed writ petition

No.354/94 before the High Court of Bombay at Aurangabad

Bench which admittedly has no territorial jurisdiction. The

High Court did not pass any interim orders but issued notice

returnable on February 8, 1994. On January 27, 1994,

Garware appeared before- the BIFR and admitted its failure

to submit its revival proposal after rejecting its initial

proposal. By proceedings dated January 28, 1994, the

Appellate Authority dismissed the appeal of the Garware.

Subsequently, Garware amended the writ petition which was

transferred by this Court to the Delhi High Court.

7. The Division Bench allowed the writ petition primarily

on the ground that Garware is "an interested person" and

"deeply interested in the revival of' the Flowmore by "stand

alone basis". The High Court set aside the orders of BIFR

dated November 19, 1993 made without notice to Garware

noting that it was violative of principle of natural justice

and fair play. The merger scheme entails with huge

financial sacrifice at the cost of the central exchequer

without notice either to the Central Government or to the

Central Board of Direct Taxes and that, therefore, the order

of revival of Flowmore (sick company) with SRF was bad in

law. Accordingly, the orders dated November 19, 1993 and

January 27, 1994 of BIFR and order dated January 28, 1994 of

the Appellate Authority were set aside and remitted the

matter to the BIFR for reconsideration and decision

according to law.

8. Shri F.S. Nariman, learned senior counsel for the first

appellant, contended that the High Court was wholly

unjustified in its finding that Garware is an interested

person and deeply interested in the revival of Flowmore on

stand alone basis. The BIFR was justified in its conclusion

that SRF alone was in the field to revive Flowmore. Garware

though was given number of chances to submit its revised

scheme on stand alone basis, it did not do it. The revival

by merger was not vitiated for failure to give notice to

Garware. Garware at no point of time had evinced any

interest after rejecting its revival scheme by BIFR nor did

it submit fresh proposals. The consistent conduct of

Garware would show that Garware is not an interested person.

The omission to appear either before BIFR or OA with revised

proposal is eloquent and self speaking. Its agreement with

AAL would indicate that it was interested only in earning

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profits. Garware lacked bona-fides in the revival of its

trade rival-Flowmore and intended to keep its trade rival

closed for long, as is evident from its conduct of filing

the. writ petition in Bombay High Court at Aurangabad which

has no territorial jurisdiction since Flowmore is admittedly

in Uttar Pradesh and no part of the cause of action had

arisen within the territorial jurisdiction of the Bombay

High Court. - Admittedly, it is a trade rival and had trade

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interest. It is interested to prolong the revival of

Flowmore so as to keep the company away from the

competition. It had acquiesced to the order passed by the

BIFR at different dates. The High Court was, therefore, not

right in its conclusion that Garware was deeply interested

person and is entitled to file its revised scheme on stand

alone basis. While conceding that notices to the Central

Government and the Central Board of Direct Taxes necessarily

should have been given by the BIFR, he contended that SRF

had expressly given up before BIFR the benefits of s.72-A.

During the course of the hearing in the High Court, his

counter-part, Shri Harish Salve, had undertaken and SRF

still stood by, that the revival scheme would be operative

from April 1, 1994. Thereby, other benefits of set off

under s.70, 71 and 72 of the Income Tax Act would be

marginalised. Therefore, there would be no revenue sac-

rifices to the State. The benefit of rebate on interest on

the outstanding loans paid during relevant accounting year

to the banks and financial institutions would be available

either to Flowmore on stand alone basis or SRF on merger

basis since it would arise only after the rehabilitating the

company. Therefore, there is no revenue loss or revenue

sacrifice to the State. The preamble and the provisions of

SICA would indicate that revival of the company should be

done expeditiously. The proceedings before BIFR or Appel-

late Authority or before the Court under Article 226 are

meant to be disposed of expeditiously and should not be

procrastinated. The delay in revival would entail the

workmen with great financial hardship and loss of revenue to

the State. Therefore, it was not meant to be used by trade

rival to prolong the rehabilitation. The BIFR without

unduly prolonging the matter, should enquire and complete

the proceeding keeping always the urgency at the back of its

mind.

9. Shri Desai, learned senior counsel for Garware,

contended that under SICA the BIFR has to consider either

stand alone scheme or merger scheme, whichever is more

feasible to revive sick company, when change of management

was found to be not sufficient to revive Flowmore (sick

company). Since AAL had submitted its revised proposal on

stand alone basis, Garware had agreed to assist AAL to

rehabilitate Flowmore on stand alone basis when BIFR

initially ordered SRF to revive Flowmore on stand alone

basis it had no grievance but when it reviewed the order and

directed revival by merger of Flowmore with SRF, notice

should have been given by BIFR to the Garware and it would

have been heard before passing the impugned order dated

January 23, 1994. The Appellate Authority committed equally

the same manifest error in that behalf. He also contended

that when a huge financial sacrifice was to be made and an

additional benefits in the region of Rs.70 crores with Rs.

10. 17 crores would accrue to SRF under s.70 to s.72-A of

the Income Tax Act, notices to the Central Government as

well as Central Board of Direct Taxes were mandatory. An

order of revival by merger

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without notice to them is per-se illegal.

10. Having given our anxious consideration to the respective

contentions, we are of the view that the contentions of Sri

Nariman merit acceptance. The first question for

consideration is whether the proceedings before the BIFR

should be expeditiously disposed of? The preamble of SICA

reads thus: -

"An Act to make in public interest, special

provisions with a view to securing the timely

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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. "

11. Under,s.17(1), the Board, after making inquiry, has to

decide, as soon as may be by order in writing, whether it is

practicable for the company to make its networth exceed the

accumulated losses within a reasonable time. Similarly, s.

18(1) envisages for preparations of sanction of schemes.

The Board while making the order under s. 17, the operating

agency shall prepare, as expeditiously as possible and

ordinarily within a period of ninety days from the date of

such order, a scheme as per the particulars enumerated

thereunder. Section 26 of the Act has expressly divested

the civil 'court of its jurisdiction over the orders passed

by the Board or the Appellate Authority or the proposals

made under the Act. The legislative intent which,

therefore, becomes clear is that sick or potentially sick

industry should be detected timely. Proceedings for revival

and rehabilitation of the sick or potentially sick company

should expeditiously be completed within the time frame and

if unavoidable, it should be done within a reasonable time

thereafter, say six months. The proceedings are not to be

allowed to be used as dilatory tactics to prevent reha-

bilitation of the sick company or potential sick company, in

particular by rival companies. The Board and the Appellate

Authority and the High Court should give effect to the

provisions, comply with procedural format, should finalise

the proceedings expeditiously within the time frame so that

not only the starving workmen who are kept in agonising wait

for revival of sick company without wages, be rescued, but

also needless accumulation of losses by the company and the

loss of revenue to the State is avoided.

12. The question then is whether Garware is an interested

person? The SICA indicates that the Board has to devise a

scheme for rehabilitation of sick industry with diverse

steps. Section 16 read with regulations 21 to 25 provides

the procedure for inquiry by BIFR to determine whether the

industry became a sick company. On recording its finding

under s. 1 7(1 ) read with regulation 26 that it became a

sick company, the Board has to decide whether it is

practicable to make the networth of the sick company, exceed

the accumulated losses within a reasonable time as envisaged

in s.17(1). If the BIFR decides that it is not so

practicable, then next step would be whether it is necessary

or expedient in the public interest to adopt any of the

measures specified in s. 1 8 and to direct any operating

agency to prepare a scheme as provided in sub-s.(3) of s. 18

as per the provisions and R.B.I. guidelines and the Board

has been given power to review or modify such order after

the OA makes submission in that behalf as envisaged under

s.18(1)and (2) of SICA. After its examination and hearing

all concerned as envisaged under s.18(3) and regulations 27

to 3 1, the Board would finalise it and direct sanctioning

the-scheme and specify the date when the sanctioned scheme

shall come into force as enjoined under s. 18(4) of the Act.

The regulations provide the procedure in that behalf. It is

seen, as held earlier, that inquiry shall be completed and

concluded as expeditiously as possible to revise the sick

company or potential sick company.

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13. The question, therefore, is whether the procedure

Ldopted by the BIFR is vitiated by any error of law and

Garware is an interested person in reviving Flowmore. It is

seen that Garware and AAL had offered their schemes on stand

alone basis. All through SRF had submitted its scheme of

rehabilitation by merger of Flowmore with SRF. The

narration of facts given earlier obviate the need to

reiterate them. However, they make it obvious that despite

notices and opportunities given to Garware, time and again,

it did not chose to submit its revised scheme as directed by

BIFR before OA. Its consistent conduct in not appearing

before the Board on different dates, do establish that,

after rejection of its scheme initially submitted, Garware

evinced no interest in the matter. On the other hand, it

had entered with an agreement with AAL to extend its

technical know-how assistance for revival of Flowmore for

consideration even though at every stage, the proceedings

were communicated to Garware. Therefore, G was put on

notice of the steps taken and the orders passed by the

Board. Yet Garware evinced no interest in the revival of

Flowmore on stand alone basis or any other alternative

scheme. Thereby it is not a person interested. For its

initial interest evinced by Garware, it had acquiesced by

its conduct in the orders passed by the Board. It is true

that in the order dated April 23, 1993, the Board declined

to approve merger scheme of SRF on the premise that SRF

would gain undue advantage of the tax benefits under s.72-A

etc. etc. and stand alone basis proposal was ordered to be

published. But when the mistake it had committed in the

matter was brought to its notice, the Board reviewed its

order on November 19, 1993, no doubt without hearing any

party and accepted the scheme for merger of Flowmore with

SRF and direction in that behalf was accordingly issued to

the OA for publication of scheme as draft scheme. Since

Garware had acquiesced in the order passed and had not

evinced any interest, only two persons that remained in the

field were AAL and SRF. AAL also did not challenge the

order. SRF unquestionably a 'healthy' company and its

capacity to revise Flowmore was not in doubt. All through

its scheme was for merger of Flowmore with SRF. Therefore,

no fault can be found with the orders passed by the Board

approving the scheme of the OA of the merger of Flowmore

with SRF for revival of Flowmore. The High Court was

clearly in error in holding that though Garware stood by, it

was not out and still an interested person and was entitled

to be heard before accepting the scheme of SRF for merger of

Flowmore with SRF.

14. It is true that no notice was issued by the Board

either to the Central Government or to the Central Board of

Direct Taxes. He Central Government shall be required to

pass an order under s.72-A of

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tax benefits and that therefore it is entitled to be heard.

Since merger scheme, which was given effect from April 1,

1992, involves tax concessions and sacrifices enumerated in

ss.70, 71 and 72 as set off. So, there would be great

revenue losses. Therefore, Central Government and Central

Board of Direct Taxes are necessary and proper parties

before the Board. The Board before finalising merger scheme

and approving its draft scheme for merger of the sick

industrial company with a healthy company, notice should be

given to the Central Government as well as to the Central

Board of Direct Taxes. Admittedly by two letters SRF had

given up the benefits under s.72-A. The counsel for the SRF

had given an undertaking in the High Court and reiterated

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before this Court that the merger scheme would be effective

from April 1, 1994. Consequently, the benefits of set off

under ss.70, 71 and 72 have been marginalised and,

therefore, no considerable revenue loss would occur to the

public exchequer. Any minor benefits would be consequential

to the offer of merger with the healthy company. In these

appeals and before the High Court, they are impleaded as

respondents and were heard through Sri. Ahuja, learned

senior counsel, who has stated that there would be no loss

of revenue to the State and benefit under s. 43-B of Income

Tax Act is bound to be given to a company revived on either

basis. In that view, the order passed by the Board and

approved by the Appellate Authority are not vitiated by any

error of law warranting interference.

15. The appeal filed by the shareholder smacks a bone-

fides. After hearing him and others by proceedings dated

December 6, 1991, the Board declared "Flowmore to be a sick

industrial company." As per the audited report for the year

ending 31.3.91, the accumulated losses stood at Rs.1131.45

lakhs against the networth of Rs.764.80 lakhs comprising of

paid-up capital only, the company has suffered cash loss of

Rs.451.72 lakhs and Rs.626.60 lakhs for the years ending

31.3.90 and 31.3.91, respectively. As on 31.3.91, the

company owned Rs.2699.10 lakhs to the financial institutions

and the banks besides other contingent liabilities.

According to Section 3(o), "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. He had not challenged the order of BIFR declaring

Flowmore a sick company by filing any proceedings in the

High Court. Proceedings under s.16 were initiated on the

basis of the report by Board of Directors of Flowmore and

its audit report. On the other hand, he stood by and has

shown only a facade of interest by filing appeal as a

pretext before the Appellate Authority against the final

order passed by the Board by which date Garware had already

initiated writ proceedings. The camouflage of interest is

torn apart from his conduct which would indicate that he is

only pretender to Garware who intends to see that Flowmore,

a trade rival, would not be revived so that he may continue

to have market monopoly in the field. Therefore, he is only

a stooge in the hands of Garware -and his special leave

application directly filed under Article 136 against the

orders of the Appellate Authority deserves to be dismissed

with exemplary costs of Rs.25,000/-.

16. The appeals arc accordingly allowed. The orders of

the High Court are

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set aside and those of the Appellate Authority and the Board

are confirmed with costs quantified as Rs.20,000/-. All

costs may be deposited with the Supreme Court Legal Aid

Committee within four weeks and in default, the SCLA

Committee would be entitled to recover the same as a decree

in its favour.

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