TMI Blog1998 (5) TMI 334X X X X Extracts X X X X X X X X Extracts X X X X ..... ll such orders. No such thing was done. We, therefore, cannot accept the conten- tion of the respondents that the reference under section 15 and the registration thereof by the BIFR became bad because of any conduct of the Company before the High Court. It follows that equally the subsequent orders passed by the BIFR on the reference cannot, on that account, be said to be invalid. This contention of the respondents is rejected. Point 1 is held against the respondents. No difficulty in holding that after the amendment to regulation 19 with effect from 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 under section 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. The impugned orders dated 28-7-1997 and 8-8-1997 of the High Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d vacated. The respondents are Vardhman Spg. General Mills Ltd., the creditors, who filed the winding up petition 415 of 1996 on 6-8-1996 against the appellant in the High Court of Bombay. 4. Civil Appeal (arising out of SLP (C) No. 15736 of 1997) is filed by the workmen (Engineering Kamgar Sangh) against the order dated 8-8-1997 passed by the Division Bench in winding up proceedings confirming the order of the Single Judge appointing provisional liquidator. They are supporting the appellant company. 5. That is how these three appeals have arisen and have come before us. The appellant-company had, after taking some adjournments before the Division Bench in the Company Appeal - which was filed against the order of the learned Single Judge appointing provisional liquidator - submitted a reference before the Board for Industrial and Financial Reconstruction ('the BIFR') on 17-7-1997 under the Sick Industrial Companies (Special Provisions) Act, 1985 ('the Act'). The said reference was registered on 24-7-1997 as Case No. 97 of 1997. The point raised in these appeals is that once the reference was registered by the BIFR on 24-7-1997, the Division Bench of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen an affidavit was filed - without disclosing that the Company had approached the BIFR on 17-7-1997 - and the matter was got adjourned to 29-7-1997 and again to 8-8-1997. The factum of registration of the reference by the BIFR on 24-7-1997 was not disclosed to the High Court till 8-8-1997. The Bench, therefore, rightly criticised the conduct of the appellant for not disclosing these facts to the High Court before 8-8-1997. Further, in the High Court, the Company was opposing the appointment of provisional liquidator on the plea that it was a viable unit but when it approached the BIFR, it was claiming that it was a sick industry. These contradictory pleas also came up for adverse comment by the High Court. The Bench referred to section 22 and section 16 of the Act and felt that the mere registration of the reference under section 15 did not amount to 'pendency of any inquiry' under section 16 and that, therefore, section 22 was not attracted and, therefore, the Bench was well within its powers in vacating the stay and confirming the appointment of provisional liquidator or in appointing a receiver. In that context, the Bombay High Court followed a decision of a Division B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng that the allegations made by the Bank against the Company had been considered by the IDBI and that the IDBI had prepared a status report and that the BIFR was satisfied that the allegations of the Bank against the company - in regard to the change in the accounting year and provision for depreciation and interest and in regard to the prepara-tion of the balance sheet - could not be accepted inasmuch as these actions 'were permissible under the various provisions of the Com-panies Act, 1956 and as such, these were valid under law'. The matter was adjourned to enable the Company to submit its revival/rehabil- itation proposals. These are the three orders passed by the BIFR subsequent to the impugned orders of the Bombay High Court. 10. It was contended before us by Sri Soli Sorabjee and Sri Harish Salve, appearing for the company in the two appeals filed by the company and by the counsel for the workmen in the third appeal that the Division Bench ought not have vacated the stay dated 20-12-1996 nor confirmed the appointment of provisional liquidator dated 18-10-1996 by its order dated 8-8-1997 when by that date, section 22 had come into play on account of the registra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 997 vacating the stay order dated 20-12-1996 and confirming the appointment of provisional liquidator on the company side and also whether it was permissible for another Division Bench of the High Court to appoint a receiver on 28-7-1997 in the proceedings arising out of the suit, in view of section 22? 13. Point 1 : It is true that in the winding up proceedings and in the civil suit, the appellant-company contended that it was a viable unit and that neither a receiver nor a provisional liquidator could be appointed. The appellant was, on the one hand, seeking adjournments before the Division Bench while on the other hand, it had approached the BIFR on 17-7-1997 and got its reference registered on 24-7-1997 seeking to be declared a sick company. It is also true that in the affidavit filed on its behalf in the High Court on 22-7-1997 seeking an adjournment, it had not disclosed to the Division Bench that it had moved the BIFR on 17-7-1997. The company sought an adjournment to 29-7-1997 and then again to 8-8-1997. Neither on 22-7-1997 nor on 29-7-1997 was the High Court informed about the application filed before the BIFR nor about its registration. A disclosure of these facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpletion of inquiry' to the company so as to make its networth exceed its accumulated losses within a reasonable time or to direct the operating agency to prepare a scheme in the manner provided in section 18. Section 19 deals with 'Rehabilitation by giving financial assistance'. Section 20 refers to the winding up of the industrial unit if it is not likely that the Company will be able to make its networth exceed its accumulated losses. Section 22 with which we are concerned here, deals with 'Suspension of legal proceedings, contracts, etc' where an inquiry under section 16 is pending or any scheme under section 17 is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal under section 25 before the appellate authority (AAIFR) is pending. 19. The point which has, in this context, been raised in several High Courts is that the mere registration of a reference by the BIFR under the Act, would not result in the automatic cessation of all proceedings which are pending either in civil courts or in the Company Court, etc., as against its assets. It is argued that in order that section 22 can come into operation, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re an appeal under section 25 relating to an industrial company is pending, then, notwithstanding anything contained in the Companies Act, 1956 (1 of 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. [Emphasis supplied] 21 . It is to be noticed that according to section 22, in case an 'inquiry under section 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 com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e procedure it may follow for conducting an inquiry under section 16(1) and nothing more. In fact, once the reference is registered after scrutiny, it is, in our view, mandatory for the BIFR to conduct an inquiry. If one looks at the format of the reference as prescribed in the Regulations, it will be clear that it contains more than fifty columns regarding extensive financial details of the Company's assets, liabilities, etc. Indeed, it will be practically impossible for the BIFR to reject a reference outright without calling for information/documents or without hearing the Company or other parties. Further, the Act is intended to revive and rehabilitate sick industries before they can be wound up under the Companies Act. Whether the company seeks a declaration that it is sick or some other body seeks to have it declared as a sick company, it is, in our opinion, necessary that the Company be heard before any final decision is taken under the Act. It is also the legislative intention to see that no proceedings against the assets are taken before any such decision is given by the BIFR for in case the Company's assets are sold, or the company wound up it may indeed become dif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . On that reasoning it held that there can be stay as contemplated by section 22 only when section 16(1) stage of inquiry has arrived and not at the stage of section 15 dealing with registration of the reference. It further held that it is only when the BIFR, i.e., the Bench of the BIFR issues notices under section 16(1) for inquiry or asks the operating agency to inquire, - that the 'inquiry' can be said to have commenced. This line of reasoning has been applied by the Rajasthan High Court also and by the Bombay High Court in the judgment under appeal. Question is whether this view is correct? 27. Now, regulation 19(4) which is concerned with section 15 requires that upon receipt of a reference, an acknowledgement is to be issued stating expressly that the reference has been received 'subject to verification that the reference is in order'. If on scrutiny, the reference is in order, then it will be registered under regulation 19(5). Regulation 19(5) has been amended recently with effect from 24-3-1994 which is of a date very much subsequent, in point of time, to the date of the judgment of the Calcutta High Court. The new regulation 19(5) as substituted with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16(1). The result is that strictly speaking, after the amendment of regulation 19(5) on 24-3-1994, the latter part of regulation 19(5) falls into Chapters III and IV of the regulations which are referable to 'Inquiries' under section 16, rather than into Chapter II which deals with 'Reference' under section 15. The Chapter headings cannot, in our opinion, be treated as rigid compart- ments. 30. There can, therefore, be no difficulty in holding that after the amend- ment to regulation 19 with effect from 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 under section 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. 31. On the facts of this case, the impugned orders dated 28-7-1997 and 8-8-1997 of the High ..... X X X X Extracts X X X X X X X X Extracts X X X X
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