M/S. Foremost Industries (India) … vs The A.A.I.F.R. & Others on 24 August, 2000

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Delhi High Court
M/S. Foremost Industries (India) … vs The A.A.I.F.R. & Others on 24 August, 2000
Equivalent citations: (2000) 4 CompLJ 362 Del
Author: P . Arijit
Bench: A Pasayat, D Jain


Arijit Pasayat, CJ.

1. Though various points have been urged in this writ application, in essence, the issue to be adjudicated is whether the Board for Industrial and Financial Reconstruction (in short ‘BIFR’) can proceed or not when either a petition for winding up of a company is pending or an order of winding up has been passed under the Companies Act, 1956 (in short ‘Companies Act’)? Incidentally further, question to be adjudicated is whether appointment of an official liquidator/liquidator under the Companies Act would take away jurisdiction of BIFR established under the Sick Industrial Companies (Special Provisions) Act 1985 (in short the ‘Act’) to deal with a reference made under Section 15 of the said Act?

2. Undisputed factual position is that BIFR refused to entertain application for reference made by the petitioner under Section 15 of the Act, on the ground that an official liquidator had been appointed, in terms of the consent arrangement made between the parties. The observations in this regard made by the BIFR are in the following terms: “After hearing the submissions made and having regard to the facts of the case, the Bench dismissed the case as nonmaintainable in view of the aforesaid orders by Mumbai High Court read with Consent Terms about automatic appointment of official liquidator of the company upon defaults committed by the company in accordance with the provisions of section 456 and 457 of Company’s Act.”

The Appellate Authority for Industrial and Financial Reconstruction (in short the ‘AAIFR’) endorsed the conclusion with the following observations: “We also note that whereas the High Court order dated 28.9.93 stipulated the appointment of the official liquidator as a provisional liquidator, paragraph 7 of the consent terms annexed to the High Court’s order dated 28.1.94 stipulates appointment of the official liquidator as the official liquidator under section 456 read with section 457 of the Companies Act, 1956. It appears to us that this implies the decision for the winding up of IIL. Under these circumstances the BIFR has no jurisdiction to proceed further in this case.

3. The question, whether the order of winding in respect of a company takes away the jurisdiction of the BIFR, was examined by the Apex Court in M/s. Rishab Agro Industries Ltd. Vs. P.N.B. Capital Services Ltd. 2000 (4) Supreme 632. It was inter alia observed as follows:

“It has been further suggested on behalf of the respondentbank that the action of the appellant was mala fide inasmuch as it sought time from the court to make the payment or the amount due and after seeking indulgence mala fiddly made the reference to the BIFR on 30th September 1997. It is contended that after the order of the winding up and appointment of the liquidator, the Board of Directors had no jurisdiction to move the BIFR by passing a resolution. Such a submission cannot be accepted. In a winding up petition the liquidator is appointed to protect the assets of a company for the benefit of its creditors, secured and unsecured and others. It is not the function of the official liquidator to start the process of rehabilitation of the company as is aimed at under the Act. Despite appointment of the official liquidator, the Board of Directors continue to hold all residuary powers for the benefit of the company which includes the power to take steps for its rehabilitation. The Board of Directors in the instant case were not in any way by any judicial order debarred from taking recourse to the provisions of the Act for the purposes of rehabilitation of the company. If there existed a power, its exercise cannot be termed to be mala fide only because it was initiated after availing the opportunity to make the payment of the amounts due and passing of the order of winding up of the company.

It may also be noticed that winding up order passed under the Companies Act is not the culmination of the proceedings pending before the Company Judge but is in effect the commencement of the process. The ultimate order to be passed in such a petition is the dissolution of the company in terms of Section 481 of the Companies Act. The words “shall be deemed to commence” in Section 441 of the Companies Act clearly show the intention of the legislature that although the winding up of a petition does not in fact commence at the time of presentation of the petition itself but it shall be presumed to commence from the stage. The word “deemed” used in the Section would thus mean “supposed”, “considered” “construed” “thought” “taken to be” or “prescribed”.”

4. In view of the aforesaid views expressed by the Apex Court, the inevitable conclusion is that both the BIFR and AAIFR were wrong in holding that the reference made under Section 15 of the Act before the BIFR was not maintainable. The BIFR is to take up the reference in accordance with law.

5. Learned counsel appearing for some of the respondents submitted that the petitioner has not come with clean hands and it has suppressed many materials and vital aspects. It is also submitted that the petitioner is siphoning away funds by surreptitious disposal of assets with the intention of defrauding the creditors.

6. In Real Value Appliances Ltd. Vs. Canara Bank and Others , it was observed that when Section 16(1) says that BIFR can conduct enquiry “in such a manner as may deem fit”, the said words are intended only to convey that wide discretion is vested in the BIFR in regard to the procedure it may follow for conducting an enquiry under Section 16(1) and nothing more. In fact once the reference is registered after scrutiny, it is, mandatory for the BIFR to conduct an enquiry. 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 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 is wound up it may indeed become difficult later to restore status quo ante. The BIFR shall hear the matter afresh and it shall be open to it to take into consideration subsequent events, if any, and decide whether the operating agency already operating is to be operative further or any variation in terms of the appointment of the operating agency is necessary. We make it clear we have not expressed any opinion on merits. Parties shall be free to move BIFR for protection of assets and if it is satisfied that there is in reality disposal of assets to defraud creditors, appropriate orders, can be passed in accordance with law and in the proper perspective.

7. To avoid unnecessary delay, let the parties appear before the BIFR on 12th September 2000 so that necessary orders can be passed by it. In the meantime, orders passed by the BIFR are stayed. Fresh orders, it goes without saying, has to be passed.

8. In view of our order setting aside the orders passed by the BIFR and the AAIFR, the provisions of Section 22 of the Act, so far as they are applicable, would apply.

Petition stands disposed of accordingly.

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