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Stay of Suit sine die against sick co. as per BIFR

Comment : The Court was faced with the question whether a suit against a sick company (under BIFR) is liable to be stayed/adjourned sine die in the event of company not admitting the claim ? 
The Court held no – if the company admitted the claim the situation would have been otherwise – however since they disputed and took contrary claims – the adjudication is necessary – furthermore the fact that no scheme for settlement was made – played with the court when it considered the plea. 

Sunil Mittal Properties Of M/S … vs M/S Lml Ltd on 17 January, 2011

* IN THE HIGH COURT OF DELHI AT NEW DELHI + IA 7089/2009 in CS(OS) NO.2449/2008 Date of Decision : 17.01.2011

SUNIL MITTAL PROPERTIES OF M/S SHREE SHYAM

PACKAGING INDUSTRIES ……Plaintiff Through: Mr.Dinesh Goyal, Advocate.

Versus

M/S LML LTD. …… Defendant Through: Mr.R.Singh, Advocate.

CORAM :

HON’BLE MR. JUSTICE V.K. SHALI

1. Whether Reporters of local papers may be allowed to see the judgment? YES

2. To be referred to the Reporter or not ? YES

3. Whether the judgment should be reported in the Digest ? YES V.K. SHALI, J.

IA No. 7089/2009

1. This order shall dispose of IA bearing no. 7089/2009 under Section 22(1) of the Sick Industrial Companies (Special) Provisions Act, 1985 (hereinafter referred as ‘the Act’).

2. Briefly stated the facts of the case are that the plaintiff had filed a suit in the month of November 2008 for recovery of a sum of Rs.44,05,803.47 against the defendant. It was alleged in the plaint that the plaintiff is a proprietor of M/s Shree Shyam Packaging Industries, Gulshan Park, Opposite Rajdhani Dal Mill, Main Rohtak Road, Nangloi, Delhi-110041 and is engaged in the business of manufacturing and selling IA 7089/2009 in CS(OS) No. 2449/2008 Page 1 of 16 packaging material. The defendant is a company engaged in the business of manufacturing and selling of two-wheeler scooters in the domestic as well as in foreign market. In the course of its business activities, the defendant required wooden crates for packaging of its scooters meant for the purpose of export. On account of the said crates having been supplied by the plaintiff, it was alleged that the defendant on account of non-payment of various bills starting from 26.11.2005 to 31.01.2006 owed a sum of Rs.24,83,409.27. In respect of the aforesaid amount, the plaintiff filed a suit along with the interest @ 24% per annum because of the default on the part of the defendant to clear the payment within 45 days for which the credit was given to the defendant. The interest component which was calculated was to the tune of Rs.15,39,714.20 starting from 01.04.2006 till the filing of the present suit i.e. 31.10.2008 and that is how a sum of Rs.44,05,803.47 was claimed.

3. The defendant filed its written statement and contested the claim of the plaintiff. The preliminary objection was raised regarding the maintainability of the plaint itself on the ground that the defendant was a sick company and the present suit could not be proceeded. The jurisdiction of the Court was also challenged as it was alleged that the Court in Kanpur has the exclusive jurisdiction. On merits, the defendant IA 7089/2009 in CS(OS) No. 2449/2008 Page 2 of 16 denied the liability to pay the aforesaid amount to the plaintiff.

4. After completion of the pleadings, the defendant filed an application raising a plea that the proceedings of the suit be adjourned sine die on account of the fact that the defendant was a sick company and by virtue of Section 22 (1) of the Act, the suit for recovery could not be continued for want of permission by the BIFR. In order to support its contention, the defendant along with the application had placed on record the photocopy of the letter dated 15.09.2006 written to the whole-time Director of the defendant company, by the Registrar, BIFR, intimating that its reference dated 08.09.2006 was registered as a case no. 80/2006 with the BIFR on appeal to the Secretary, BIFR. A copy of the order dated 17.05.2007 in Case no. 80/2006 by the BIFR was also annexed wherein it was observed as under:

“(ii) The secured/unsecured creditors are not permitted to file/pursue suits already filed at this stage. The bench, however, would reconsider its decision if the direction/guidelines issued are not complied with by the company within the given time frames.”

5. On the basis of these orders having been passed by the BIFR, the contention of the learned counsel for the defendant, is that as the defendant being a sick industrial company within the definition of Section (3) (1) (o) of the Act, and as there are orders passed by the BIFR on 15.09.2006 and 17.05.2007, by virtue of IA 7089/2009 in CS(OS) No. 2449/2008 Page 3 of 16 Section 22 of the Act, the proceedings of the present suit be adjourned sine die, awaiting the final decision of the BIFR. In order to support its contention, the defendant in para 5 of the application has referred to various judgments of the Apex Court as well as of the High Courts although they are not cited.

6. The plaintiff in its reply to the application took a plea that the defendant had not admitted its liability to pay the suit amount and the dues are not reckoned in the scheme of rehabilitation, consequently the proceedings cannot be stayed. It was stated that since the defendant has denied its liability, therefore, in the light of the pronouncement of the Hon’ble Supreme Court in case titled Dy. Commercial Tax Officer Vs. Corromandal Pharmaceuticals AIR 1997 SC 2027, the suit must continue, notwithstanding that the defendant being a sick company.

7. During the pendency of the suit, the defendant also purported to have filed an affidavit dated 01.05.2010 of Mr. D. R. Dogra wherein a statement of accounts of M/s Shree Shyam Packaging Industries, the proprietary concern of the plaintiff, as on 31.03.2006 has been enclosed. It has been stated that in the statement defendant is shown to have been owing a sum of Rs.21,70,490.88 to the plaintiff as on 31.03.2006 and IA 7089/2009 in CS(OS) No. 2449/2008 Page 4 of 16 this was supported by the auditor’s certificate annexed along with the affidavit. However, it was contended that the said statement shows that the debit notes which were duly issued by the defendant, have not been considered by the plaintiff. It has also been alleged that there was a difference in the opening balance as on 01.04.2005 reflected in the accounts of the two parties and this was on account of certain bills not taken into account in the statement. It is alleged that once the statement of accounts is reconciled then the plaintiff could apply to the BIFR and claim the amount due and payable to him as an unsecured creditor. It has also been contended that the plaintiff has not refuted the contention of the defendant with regard to the averments made in the affidavit.

8. I have heard the learned counsel for the parties and perused the record. The main contention of the defendant is, since the reference of the defendant, has been registered on 15.09.2006 with the BIFR, the present suit for recovery filed by the plaintiff in the year 2008, ought not to be continued in the absence of a specific permission obtained from the BIFR in this regard. Reliance in this regard was placed on the order dated 17.05.2007 of the BIFR, relevant portion of which has been reproduced hereinabove in para 3. It was also IA 7089/2009 in CS(OS) No. 2449/2008 Page 5 of 16 contended that the plaintiff is an unsecured creditor, and therefore, once the accounts were reconciled he could stand in the queue along with the other unsecured creditor and retrieve the amount which may be payable to him on the direction of the BIFR. The learned counsel for the defendant has not cited any specific judgment in order to support his submission although a number of judgments have been mentioned in the application itself and a couple of photocopies of the Apex Court judgment have been given.

9. The learned counsel for the plaintiff refuted this contention with regard to adjourning the proceedings of the case sine die, on account of pending reference on the ground that the debt of the plaintiff was neither reckoned nor admitted by the defendant, and therefore, in terms of the judgment of Apex Court in Corromandal Pharmaceuticals case (Supra) the suit must continue till the time the liability of the defendant is determined. With regard to the non filing of the reply to the affidavit of Mr. D. R. Dogra, it was contended by the learned counsel for the plaintiff that the entire effort on the part of the defendant is to mislead the Court by taking contrary stand thereby ensuring that the proceedings of the present suit for recovery gets delayed. It was urged that apart from preliminary objections, the defendant in IA 7089/2009 in CS(OS) No. 2449/2008 Page 6 of 16 its written statement has specifically denied the liability to pay any amount to the plaintiff. It was only during the course of pendency of the suit that the present affidavit of Mr. D. R. Dogra was filed wherein a reference has been made to the effect that according to the statement of account duly audited by the auditors, only a sum of Rs. 21 lakhs or so was shown to be owed by the defendant to the plaintiff but even this admission by the defendant against its own interest is not without any condition. It has been contended by the learned counsel for the plaintiff that the defendant has taken the plea that while calculating this amount as an outstanding amount, the plaintiff has not taken into account various debit notes which were issued by the defendant, and therefore, the accounts need to be reconciled. So indirectly the admission which is purported to have been made by the defendant is withdrawn by the said defendant or it could at its best, be a conditional admission of its liability which is no admission in eyes of law. In the absence of unambiguous admission by the defendant, it will not be feasible to stay the proceedings of the present suit.

10. I have carefully considered the submissions of the respective sides and have also gone through the record as well as through the judgments referred to by the IA 7089/2009 in CS(OS) No. 2449/2008 Page 7 of 16 learned counsel. Before dealing with the facts of the case, it would be worthwhile to reproduce the Section 3(1)(o) of the Act which defines the sick company and the Section 22 of The Industrial Companies (Special Provisions) Act,1985.

“Section 3(1) (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.”

“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 (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.”

11. A perusal of the said two provisions clearly shows that there is no dispute about the fact that the defendant is a sick company and a reference registered by the BIFR vide case no. IA 7089/2009 in CS(OS) No. 2449/2008 Page 8 of 16 80/2006 is pending for consideration. Although the said reference is pending with the BIFR for the last more than five years, the defendant has not been able to place on record any document to show as to what is the present status of the said reference, as to whether the BIFR has declared that the defendant company cannot be revived or whether it can be revived and in case, it can be revived, whether any scheme of rehabilitation has been formulated. Therefore, in the absence of this information the only thing which is to be assumed is that the reference is still pending for final disposal in respect of the defendant company.

12. Section 22 of the Act which prohibits the filing or continuing of the legal proceedings and contracts, has been a subject matter of intense consideration and exhaustive examination by the Apex Court and by the other High Courts including that of our own High Court. The following propositions broadly emerged from the analysis of Section 22 of the Act. The object of Section 22(1) of the Act is essentially to protect the sick companies against the proceedings for winding up or for execution or distress or for enforcement of any security or guarantee against the said company on account of the fact that the company in question is a sick company and is already under consideration of an appropriate forum that is BIFR or AAIFR as to whether it be restored back to its financial health so as to make it a viable functioning unit or IA 7089/2009 in CS(OS) No. 2449/2008 Page 9 of 16 whether it should be wound up for the good. Section 22 of the Act has been enacted by the legislature also with a view to prevent any strain on the resources of the already scarce resources of the sick company or from creating any obligation or impediment in restoring it back to its normal health.

13. It is in this backdrop of aforesaid object of Section 22 of the Act that the Courts have come to the rescue of the sick company to restrain recovery proceeding on account of various statutory liabilities like sale tax, income tax, octroi, house tax and other liabilities, sought to be affected against the sick company.

14. The Division Bench of our own High Court in case titled Intercraft Limited Vs. Cosmique Global and Anr. in W.P.(C) No. 8803/2009 dated 30.09.2010 has set aside the confirmation by the appellate forum of the sale and the auction of the property in favour of the respondent no. 1. Similarly, in case titled Shree Chamundi Mopeds Ltd. Vs. Church of South India Trust Association AIR 1992 SC 1439, the Apex Court did not stay the eviction of the sick company from a tenanted premises as it does not put any strain on its financial resources. It was observed that there should be no impediment on account of Section 22 of the Act in continuing with the eviction proceedings against the sick company. Thus, a pragmatic and practical view was taken by the Court in continuing with the eviction proceedings IA 7089/2009 in CS(OS) No. 2449/2008 Page 10 of 16 against the sick company as it did not put any strain on the financial resources of the sick company, and therefore, did not create any impediment.

15. This case by case approach is also dealt with by another Division Bench of our own High Court in case titled Saketh India Limited Vs. W. Diamond India Ltd. in RFA(OS) No.114/2009, where it has practically analyzed almost all the judgments of importance on the subject and observed as under:

“Courts, however, have always been alive to the possible mischief that invocation of SICA can lead to. In a nutshell, where the net worth of a company is reduced to a negative, and the amelioration that is sought is for reviving the company rather than winding it up, the recourse to the Act would be legitimate. There is no justifiable reason, therefore, for all legal proceedings to be immediately even held in abeyance, if not dismissed. We are mindful of the fact that Parliament has incorporated an amendment in the Section with effect from 1.2.1994 in these words – “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”. It appears to us that the phrase “recovery of money” must be construed ejusdem generis and accordingly

recovery proceedings in the nature of execution or any other coercive enforcement that has been ordained to be not maintainable. We do not find any logic in holding legal proceedings to be not maintainable, or to be liable to be halted unless, even if the debt sought to be proved in the Plaint has not been admitted.”

16. Obviously the Division Bench have echoed observation of the Apex Court in Dy. Commercial Tax Officer Vs. IA 7089/2009 in CS(OS) No. 2449/2008 Page 11 of 16 Corromandal Pharmaceuticals AIR 1997 SC 2027 wherein the following observations were made

“Any step for execution, distress or the like against the properties of the industrial company other of similar as steps should not be pursued which will cause delay or impediment in the implementation of the sanctioned scheme. In order to safeguard such state of affairs, an embargo or bar is placed under Section 22 of the Act against any step for execution, distress or the like or other similar proceedings against the company without the consent of the Board or, as the case may be, the appellate authority. 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 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 under Section 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. Any other construction will be unreasonable and unfair and will lead to a state of affairs enabling the sick industrial unit to collect amounts due to the Revenue and withhold it indefinitely and unreasonably. Such a construction which is unfair, unreasonable and against spirit of the statute in a business sense, should be avoided.

The situation which has arisen in this case seems to be rather exceptional. The issue that has arisen in this appeal did not arise for consideration in the two cases decided by this Court in Gram Panchayat and Anr. v. Shree Vallabh Glass Works Ltd. and Ors. MANU/SC/0188/1990 : [1990] 1 SCR 966 and Maharashtra Tubes Ltd. v. State Industries and Investment Corporation of Maharashtra Ltd. and Anr. MANU/SC/0427/1993 : [1993] 1 SCR 340 . It does not appear from the above two decisions of this Court nor IA 7089/2009 in CS(OS) No. 2449/2008 Page 12 of 16 from the decisions of the various High Courts brought to our notice, 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 those 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. The two decisions of this Court as also the decisions of High Courts brought to our notice are, therefore, distinguishable. They will not apply to a situation as has arisen in this case. We are, therefore, of the opinion that Section 22(1) should be read down or understood as contended by the Revenue. The decision to the contrary by the High Court is unreasonable and unsustainable. We set aside the judgment of the High Court and allow this appeal. There shall be no order as to cost.”

17. Thus, the aforesaid judgments clearly lays down that the proceedings of a recovery simplictor need not be stayed unless and until the amount sought to be recovered by the defendant is reckoned or taken into consideration in the rehabilitation scheme before BIFR. The judgment of Corromandal case (supra) has been referred to in the application by the defendant but in my view on account of the observations quoted above, it does not support the case of the defendant.

18. It may be pertinent here to refer to some of the judgments which find mention in the application of the defendant for staying the proceedings. The judgments of Apex Court in Jay Engineering Works Ltd. Vs. Industry Facilitation Council AIR 2006 SC 3252, Gram Panchayat Vs. Shree Vallabh Glass Works Ltd. IA 7089/2009 in CS(OS) No. 2449/2008 Page 13 of 16 AIR 1990 SC 1017, Real Value Appliances Ltd. Vs. Canara Bank AIR 1998 SC 2064 have been considered by the Division Bench of this Court in Saketh’s case (supra) and despite this, it has affirmed the principles of law laid down in Corromandal’s case (supra) and therefore, these judgments are of no help to the defendant.

19. Some of the other judgments which have been relied upon by the plaintiff are dealing with the recovery of statutory dues or recoveries like Octroi, sales tax, Municipal Tax, etc. There also the Court has drawn a distinction between the process of assessment and the quantified recoveries while as in the former only a process of finalization of liability has arisen, which has not been stayed but in the latter case where the recovery is actually sought of the quantified amount under any statutory dues that has to be stayed. Reliance in this regard has been placed on Rishab Agro Industries Ltd. Vs. P.N.B. Capital Services AIR 2000 SC 1583, Tata Devy Ltd. Vs. State of Orissa 1997 (94) ELT 477 (SC), Modi Stone Ltd. Vs. State of Kerala (2004) 6 COMPLJ 184 (Ker) DB. Some of the other judgments which find mention in the application are of different High Courts which are not referred in view of IA 7089/2009 in CS(OS) No. 2449/2008 Page 14 of 16 the repeated pronouncements of the Apex Court laying down the law clearly.

20. In the instant case, admittedly the defendant has denied its liability to pay the principle amount as well as the interest thereon in the written statement. During the pendency of the suit an affidavit of Mr. D.R. Dogra has been filed on 01.05.2010 wherein the reference is made by the defendant to the statement of accounts as on 31.03.2006 along with the auditor’s report to urge that the statement shows an amount of Rs.21 lakhs or so due and payable to the plaintiff but in the same breath the defendant again has disputed the sanctity, validity and the correctness of the said statement by urging that certain debit notes issued by the defendant have not been taken into account, and therefore, till the time the statement is reconciled it cannot be assumed to be correct. In effect it only shows that the defendant has still not admitted its liability to pay the amount to the plaintiff but has tried to add to the confusion regarding the maintainability of the suit of the plaintiff.

21. In view of the aforesaid facts and circumstances of the case, I feel as the defendant has not admitted its liability to pay the amount to the tune as claimed by the plaintiff nor such an amount has been reckoned or taken into consideration by any scheme of rehabilitation IA 7089/2009 in CS(OS) No. 2449/2008 Page 15 of 16 of the sick defendant company, therefore, the proceedings of the present suit cannot be adjourned sine die. As a matter of fact the defendant has not placed on record any documentary evidence to show that any such scheme has been formulated as yet and if formulated whether the said amount has been taken care of allegedly being owed to the plaintiff.

22. For the aforesaid reasons, I feel that the application of the defendant totally misconceived and accordingly, the same is dismissed.

23. List for further proceedings on 24.03.2011. V.K. SHALI, J.

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