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Sponge Iron India Ltd. v. Neelima Steels Ltd.
Factual and Procedural Background
Several petitions for winding up of various respondent companies were pending in the High Court on the ground that the companies were unable to pay their debts. In none of these petitions had a receiver or official liquidator been appointed. During the pendency of these winding up petitions, it was brought to the court's notice that for each respondent company a reference under Chapter III of the Sick Industrial Companies (Special Provisions) Act, 1985 ("the Act") had been registered by the Board for Industrial and Financial Reconstruction (BIFR) under section 16(1). The matters were repeatedly adjourned awaiting further steps under section 22 of the Act. Counsel for some petitioners argued that mere registration of a reference under section 16(1) did not attract the applicability of section 22 and that the winding up petitions could proceed.
The judge treated the effect of section 22 as a common question across the cases and heard counsel for the petitioners and for the respondent companies. The court identified two specific points for consideration: (a) whether mere proof of registration of a reference by the BIFR under section 16(1) attracts section 22; and (b) if section 22 is applicable, what is its effect on the winding up petitions.
Legal Issues Presented
- Whether the mere proof of a reference being registered by the BIFR under section 16(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 attracts the provisions of section 22?
- If section 22 is held applicable, what is its effect on the company petitions for winding up?
Arguments of the Parties
Petitioners' Arguments
- Counsel for some petitioners contended that mere registration of a reference under section 16(1) does not make section 22 applicable and therefore does not bar continuation of winding up proceedings in the High Court.
- Specifically, Sri V. Rajagopala Reddy argued that registration by the Secretary is a ministerial act and does not signify that an inquiry has commenced or is pending before the Board; he asserted that unless an inquiry as contemplated by sub-sections (2) to (4) of section 16 has commenced, section 22 should not become applicable.
- It was also contended by petitioners that adjourning matters awaiting progress before the BIFR places them at a disadvantage, since they are not parties before the BIFR and cannot readily monitor developments; petitioners were concerned about preserving the benefit of extended limitation periods under the Companies Act (sections 441 to 458A) and other rights.
Respondent Companies' Arguments
The opinion records that counsel for the respondent companies appeared and addressed the court regarding actions to be taken if section 22 was held applicable, but the opinion does not set out detailed, specific arguments advanced by the respondents in the text provided.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Industrial Finance Corporation of India v. Maharashtra Steels Ltd., AIR 1988 All 170; [1990] 67 Comp Cas 412 (All) | The decision was mentioned by petitioners' counsel; counsel characterized it as "prima facie against him" though he submitted it had not directly dealt with the precise question before the court. | The opinion records that counsel referred to this decision. The text does not record any explicit reliance on or substantive application of this precedent by the court in reaching its decision on the issues summarized in this opinion. |
Court's Reasoning and Analysis
The court examined the scheme and specific provisions of the Act, particularly chapters and sections relevant to references and inquiries (sections 15 to 22, and in particular section 16 and section 22), and how those provisions interact with winding up proceedings under the Companies Act and the jurisdiction of civil courts.
Key statutory components the court considered were:
- Section 16(1) — which authorises the Board to make such inquiry as it deems fit to determine whether an industrial company has become a "sick industrial company," either on receipt of a reference under section 15 or upon information or the Board's own knowledge.
- Other sub-sections of section 16 — which enable the Board to appoint operating agencies, appoint special directors, and require expeditious completion of inquiries (including an endeavour to complete within sixty days).
- Section 22(1) — which provides that where an inquiry under section 16 is pending (among other situations) no proceedings for winding up of the industrial company or for execution, distress, appointment of receiver, etc., shall lie or be proceeded with further except with the consent of the Board.
- Section 26 — which bars jurisdiction of civil courts in respect of any matter which the Board is empowered to decide.
- Section 31 — which saves proceedings in which a receiver or official liquidator has already been appointed immediately before commencement of the Act (the court noted a difference in language between section 22(1) and section 31).
The court reasoned as follows (based on the text of the opinion):
- An inquiry under section 16 may commence either on a reference under section 15(1) (made by the company) or under section 15(2) (by a financial institution), or on the basis of information received or the Board's own knowledge (section 16(1)(a) and (b)).
- In references under section 15(1) or 15(2), there is generally no dispute about the applicability of section 3(o) (definition of a "sick industrial company"), and the Secretary or Registrar is empowered to hold a preliminary inquiry and register the reference under section 16(1)(a); if the Secretary/Registrar declines to register, the Chairman decides on appeal.
- Where the company disputes being a "sick company," the Board may conduct an inquiry under section 16(1)(b) into that issue, following the procedures and powers in the other sub-sections to ensure a speedy and fair inquiry.
- The main object of an inquiry under section 16 is to determine whether the company falls within section 3(o), so that one of the measures under sections 17 to 20 may be adopted (revival, framing a scheme, or winding up under the Act).
- Given the statutory scheme, the court concluded that registration of a reference by the BIFR (including registration by the Secretary under delegated authority) is prima facie proof that an inquiry before the Board is pending and that the Board must take further steps toward one of the measures under sections 17 to 20.
- On that basis, the court answered Point (a) in the affirmative: once it is shown that a reference is registered under the Act, section 22 becomes applicable.
- On Point (b), the court observed that section 22(1) limits a specific class of proceedings (winding up petitions and certain execution/receiver actions) while other consequences flow from the Board's processes: petitioners may approach the Board for relief during its proceedings; petitioners may seek the Board's consent to continue winding up proceedings; and petitioners might intervene before the Board if they have material alleging that "sickness" is being used to defeat creditors' claims, though such matters must be examined by the Board.
- Weighing the statutory scheme and the hardship to creditors where large liabilities remain unpaid, the court imposed interim, specific directions to balance interests pending further action by the Board (see orders below) rather than proceeding with the winding up petitions in the High Court while a reference was registered.
The court also noted that the precise question whether winding up proceedings abate or not (given the difference in language between section 22(1) and section 31) was not canvassed and the court did not decide that issue at that stage.
Holding and Implications
Holding: The court concluded that the registration of a reference under section 16(1) of the Act is, prima facie, proof that an inquiry before the BIFR is pending and that section 22 becomes applicable upon such registration.
Immediate orders and direct effects on the parties (as recorded in the opinion):
- The court directed that the management of each respondent company must, once in every six months (on 1 January and 1 July of each calendar year), inform the respective petitioners and their counsel at the address shown in the company petition (or any changed address intimated) of the progress of the case before the BIFR, by registered post.
- The management was ordered not to alienate assets without the leave of the BIFR for a period of six months.
- The winding up petitions were closed by the court, with liberty to the petitioners to apply for reviving the petitions if it becomes permissible by virtue of any subsequent decision of the BIFR.
- The company petitions were closed and no order as to costs was made.
Implications beyond the immediate orders: The opinion observed that the broader implications of the Act's provisions may require further examination. The decision resulted in the immediate suspension (closure) of the High Court winding up petitions subject to the possibility of revival, and required periodic updates and a short restraint on alienation of assets, but the court did not purport to lay down an exhaustive precedent on all interactions between the Act and winding up jurisdiction. The opinion did not state that it was setting a new, comprehensive precedent beyond the points decided and expressly refrained from deciding certain related questions (for example, whether proceedings abate).
Final disposition recorded in the opinion: The company petitions were closed with liberty to the petitioners to apply for revival; specific interim directions to respondent companies' management were issued; no order as to costs.
Upendralal Waghray, J.:— During the pendency of several petitions for winding up of the respective respondent companies on the ground that they are unable to pay its debts (in none of which any receiver or official liquidator is appointed), it has been brought to the notice of the court that a reference under Chapter III of the Sick Industrial Companies (Special Provisions) Act, 1985 (hereinafter referred to as “the Act”), has been registered in respect of each of the respondent companies under section 16(1) of the Act by the Board for Industrial and Financial Reconstruction (“the BIFR”, in short), and the matters were adjourned on more than one occasion awaiting further steps, if any, to be taken in view of section 22 of the Act. Counsel for the petitioners in some of the cases contended that the mere registration of a reference under section 16(1) will not attract the applicability of section 22 of the Act and, therefore, the company petitions may be proceeded with.
2. As a common question as to the effect of section 22 of the Act is involved, I have heard several counsel for the petitioners and also counsel for the respondent companies who have appeared. They have also addressed arguments on the action to be taken by the court in the event section 22 is held applicable. The points that arise for consideration are:
(a) Whether the mere proof of a reference being registered by the BIFR under section 16(1) of the Act attracts the provisions of section 22?
(b) If section 22 is held applicable, its effect on these company petitions?
3. The Act has received the assent of the President on January 8, 1986, and some of its provisions were enforced from January 12, 1987, and others from May 15, 1987. Its section 2 contains a declaration and it is for giving effect to the policy of the State towards securing the directive principles specified in article 39(b) and (c) of the Constitution. According to the Objects and Reasons:
“……A need has, therefore, been felt to enact in public interest a legislation to provide for timely detection of sickness in industrial companies and for expeditious determination by a body of experts of the preventive, ameliorative, remedial and other measures that would need to be adopted with respect to such companies and for enforcement of the measures considered appropriate with utmost practicable despatch.”
4. Section 32 gives overriding effect to the Act on other laws as mentioned in it. Section 26 bars the jurisdiction of civil courts in respect of any matter which the Board for Industrial and Financial Reconstruction is empowered to decide under the Act. Section 31 saves certain proceedings mentioned in it. Section 36 confers power on the Central Government to make rules and in exercise of the said power, the Board for Industrial and Financial Reconstruction (Secretary's Powers and Duties) Rules, 1987, have been made. Section 27 of the Act empowers the Board to delegate certain statutory functions. The Board for Industrial and Financial Reconstruction Regulations, 1987, have been made, according to which some functions are assigned to the Secretary and Registrar. Section 3(o) of the Act defines a “sick industrial company”. Chapter III which comprises sections 15 to 22 provides for references of cases to be dealt with under the Act, inquiry and the measures that may be taken by the Board for Industrial and Financial Reconstruction in respect of sick industrial companies. Section 15(1) casts an obligation on the management of an industrial company which has become a sick industrial undertaking to make a reference to the Board for appropriate action. Section 15(2) enables financial institutions, etc., to make a similar reference, probably where the management of the company has itself not made it. Under section 16(1) of the Act, the Board may make such inquiry as it deems fit for determining whether any industrial company has become a sick industrial company. As mentioned in the said provision, such an inquiry may be taken up either on receipt of a reference under section 15 or upon information received with respect to such company or upon its own knowledge. Sections 17 to 21 provide for various measures which the Board may adopt to revive, rehabilitate, reconstruct or take steps for winding up a sick industrial company in the circumstances mentioned in the said provisions. Section 22(1) provides for suspension of certain legal proceedings. Section 22(2) provides for some fetters on the rights of the shareholders of the sick company. Sub-section (3) enables the Board to pass certain orders which may suspend the operation of the contracts, etc., entered into by the company. Sub-section (4) gives overriding effect to the order passed by the Board under sub-section (3), and sub-section (5) provides for suspension of period of limitation for enforcement of any right or privilege during which its remedy for enforcement was suspended under this section. It is useful to extract some relevant statutory provisions, viz.,
“16. Inquiry into working of sick industrial companies. — (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 under section 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 endeavour shall be made to complete the inquiry within sixty days from the commencement of the inquiry.
(4) Where the Board deems it 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 shall 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…
“22. Suspension of legal proceedings, contracts, etc., — (1) Where, in respect of an industrial company, an inquiry under section 16 is pending or any scheme referred to under section 17 is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal under section 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 shall lie or be proceeded with further, except with the consent of the Board or, as the case may be, the appellate authority.”
(emphasis* supplied)
“31. Saving of pending proceedings. — Where a receiver or an official liquidator has been appointed in any proceeding pending immedi-ately before the commencement of this Act, in any High Court for winding up of an industrial company, such proceeding shall not abate but continue in that High Court.”
(emphasis supplied)
5. Regulation 19 of the Board for Industrial and Financial Reconstruction Regulations, 1987, empowers the Secretary or Registrar to take necessary steps under section 16(1) where a reference is received by the Board under section 15(1) or 15(2). In case any of these officers decline to register the reference, the final decision is of the Chairman on appeal. However, if there is a controversy as to whether the industrial company has become sick within the meaning of section 3(o), the Board may conduct an inquiry on that aspect keeping in view the provisions of other subsections of section 16. The Board consists of a chairman and members who are persons of ability, integrity and experience in these fields. The main object of an inquiry under section 16 is to determine whether the provisions of section 3(o) apply and, therefore, it is a sick company with a view to take measures under sections 17 to 20.
6. Point (a): The commencement of an inquiry under section 16(1)(a) will be either consequent on a reference made by the sick industrial company itself or a financial institution named in section 15(2). In a reference under section 15(1), the company does not dispute that it is sick, and in a reference under section 15(2), the necessary material is furnished by the financial institution about its being a sick company. The question whether an industrial company is sick or not has to be determined with reference to the criteria laid down in the definition under section 3(o) which is to be generally on the basis of documents available with the Registrar of Companies, financial institutions or the company itself. Apparently, in a reference under section 15(1) and (2), there is no dispute about the applicability of section 3(o) and, therefore, the secretary or the Registrar has been given the authority to take action for registration under section 16(1)(a). In cases of refusal to register, probably due to some formal or technical defect, an appeal against it will be decided by the chairman. However, in cases where the company itself disputes the applicability of section 3(o) to it and the Board, on the basis of information, has reason to believe that it is applicable, an inquiry into that aspect becomes necessary as contemplated by section 16(1)(b) and certain provisions to help a speedy, effective and fair inquiry have been made in the other sub-sections of section 16. After the inquiry, if it is found that section 3(o) applies, the Board has to take one of the alternative measures contemplated by sections 17 to 20.
7. Sri V. Rajagopala Reddy, learned counsel appearing for one of the petitioners, contended that the mere registration of a reference under sec-tion 16(1) will not make section 22 applicable or be a ground for stopping the winding up proceedings in this court. According to him, the action of the Secretary in registering a reference is a ministerial act and it does not indicate that there has been an inquiry or any inquiry is pending before the Board. It is contended that, unless an inquiry as contemplated by any of the sub-sections (2) to (4) has commenced, section 22 does not become applicable. He has fairly stated that there is only one reported decision in Industrial Finance Corporation of India v. Maharashtra Steels Ltd., AIR 1988 All 170; [1990] 67 Comp Cas 412 (All), which is, prima facie, against him, but, according to him, has not directly dealt with this question.
8. In view of the various provisions noticed above, the inquiry contemplated by section 16 will commence either on the receipt of a reference under section 15(1) or (2) or, on the basis of any other information received by the Board for Industrial and Financial Reconstruction. These two situations are reflected in section 16(1)(a) and 16(1)(b). In the case of references, the secretary is empowered to hold a preliminary inquiry and register it and; thereafter, the Board will make such inquiry as it considers necessary in connection with the alternative measures to be adopted under sections 17 to 20.
9. Where there is no reference and the Board chooses to commence an inquiry, naturally there will be a contest by the company itself and in such cases, the Board will conduct an inquiry keeping in view the provisions of the other sub-sections of section 16. If the Board comes to the conclusion that section 3(o) applies to the company in respect of which the inquiry is being held, it will then consider one of the alternative measures under sections 17 to 20. According to the scheme of the Act, after an inquiry under section 16 has commenced and it is determined that it is a sick company within the meaning of section 3(o), the proceeding will terminate only after one of the alternative measures under sections 17 to 20 are taken. In several of the cases, large amounts (the liability for which is not disputed by the respective companies) have not been paid by the companies and the respective petitioners are suffering hardship. Probably, the petitioners or other creditors can intervene at the stage of inquiry before determination of the question of applicability of section 3(o). if they dispute it and have material to show that the industrial sickness is a device to defeat the claims and pray that some transactions of the company have to be invalidated. But this is a matter which can be examined and decided only by the Board. In view of the scheme of the Act, the jurisdiction of the court under the Companies Act is excluded by implication. The jurisdiction of the civil court is, however, excluded by section 26. Therefore, the registration of a reference by the Board for Industrial and Financial Reconstruction (may be by the Secretary under the powers conferred on him) is, prima facie, proof that the inquiry before the Board is pending and the Board has to take further steps for taking one of the alternative measures under sections 17 to 20. Once it is shown that a reference is registered under the Act, section 22 becomes applicable and this is how I would answer point No. (a). Point No. (b): The next point for consideration is the effect of section 22 on these company petitions, for winding up. It was contended by several counsel for the petitioners that the matters should be adjourned from time to time awaiting the further progress before the Board for Industrial and Financial Reconstruction. It is contended that this is necessary as the petitioners were not parties before the Board for Industrial and Financial Reconstruction and are not in a position to know the developments, and they do not like to lose the advantage of taking benefits of the extension of the period of limitation for enforcement of some of their rights in view of sections 441 to 458A of the Companies Act, etc. Section 22(1) affects only a limited class of actions like winding up petitions. After it is determined that section 3(o) applies to a company, broadly, three alternatives are possible under sections 17 to 20, viz., (a) measures to revive a company where its net worth can be increased; (b) framing a scheme; and (c) taking steps for winding up. The Board is given wide powers and the petitioners can certainly approach the Board for relief during this stage. At the same time, the hardship caused to the petitioners when the companies have, become sick is apparent. Till the Board passes an order under section 22(3), there is no restraint against the companies in alienating their properties and, probably, the petitioners may be able to move the Board, if considered necessary. The language of section 22(1) and that of section 31 indicates that such winding up proceedings shall not be proceeded with further. The question whether they stand abated or not was not canvassed and I do not consider it appropriate to go into it at this stage in view of the order which I propose to pass. Apart from the difference in language of section 22(1) and section 31, it is also open to the petitioners to seek and get consent of the Board to continue any winding up petitions. The implication of the provisions of this new legislation may require further examination. I, therefore, consider it appropriate to pass the following order:
(a) The management of respondent (i) shall, once in every six months, viz., on first January and first July of every calendar year, inform the respective petitioners and their counsel at the address shown in the company petition or to any other changed address which may be intimated, the progress of the case before the Board for Industrial and Financial Reconstruction by registered post; (ii) shall not alienate the assets without leave of the Board for Industrial and Financial Reconstruction for a period of six months;
(b) The winding up petitions are closed with liberty to the petitioners to make an application for reviving them in the event it becomes permissible by virtue of any subsequent decision of the Board for Industrial and Financial Reconstruction.
10. The company petitions are, accordingly, closed. No orders as to costs.
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