BEFORE THE APPELLATE AUTHORITY FOR INDUSTRIAL AND FINANCIAL RECONSTRUCTION

Appeal; Miscellaneous Appeal

222 of 2009; 23 of 2010, 164 of 2010

SHERVANI SUGAR SYNDICATE LIMITED - Complainant(s)

Versus

BIFR AND OTHERS - Opp.Party(s)

BEFORE: Abhay Gohil, Badal K Das, A K Mohapatra

06 Jul 2010

ORDER

[1] This appeal filed by Shervani Sugar Syndicate Limited (hereinafter referred to as the 'Appellant company') is directed against the order of the Board for industrial and Financial Reconstruction (hereinafter referred to a:; the 'BIFR') dated 21.7.2009 whereby the BIFR sanctioned the Modified Draft Rehabilitation Scheme (IvIDRS) for the Appellant company with certain modifications. The Appellant company is aggrieved by the directions at paragraphs 16(c), (d) and (e) of the impugned order, which read as under:

16. (c) Regarding restructuring of loans, there is no provision for waiver of simple interest, in the SDF rules 1983. However, reschedulement of principal and outstanding interest capitalized as principal should be considered,

(d) Paragraph 12.6(a)(2).

As there is no provision for exemption to any sugar mill from the sale oli sugar on the basis of monthly release quota system as per order notified vide notification No. G.S.R. 345(E)/Es. Com/Sugar dated 4.6.1979, the sale of sugar by the company on the basis of monthly release qutta system would continue to be regulated by aforesaid order as well as other relevant orders/statutory provisions of the Central Government, and tine State Government in this regard. This is applicable also to oilier concessions requested by the company in this sphere.

(e) Paragraph 12.6(a)(3)-

As there is no provision for exemption from levy obligation under Levy Sugar Supply (Control) Order/1979, hence no exemption can be granted to the Company from levy obligation.

[2] Briefly stated the facts of the case are:

The Appellant company was declared sick by the B1FR on 17.05.1993 and on 16.10.1995 a rehabilitation scheme (SS-95) was sanctioned by the BIFR for the Appellant company. In its hearing held on 19.06.2003, the BIFR declared the SS-95 as failed on the ground that the Appellant company/promoters failed to comply with the prescribed provisions of the SS-95. Thereafter, the BIFR formed a prima facie opinion of winding up of the Appellant company under Section 20(1) of Sick Industrial Companies (Special Provisions) Act, 1985 (hereinafter referred to as 'SICA') and issued a show cause notice for winding up. On 22.09.2003, the BIFR confirmed its prima facie opinion for winding up of the Appellant company. The Appellant company filed an appeal against the aforesaid order before the Appellate Authority for Industrial and Financial Reconstruction (hereinafter referred to as 'AAIFR') and the AA1FR, vide its order dated 21.02.2005, circulated a draft rehabilitation scheme (DRS) to all concerned agencies. The AAIFR, vide its subsequent order dated 29.07.2005, remanded the case back to the BIFR, with a direction to examine/consider the said DRS after issuance of notice to the concerned/interested parties and take further action in accordance with law. IDBI (OA) submitted the modified draft rehabilitation scheme (MDRS) "for further consideration of the BIFR vide its letter dated 25.02.2009. The BIFR circulated the MDRS, vide its order dated 2.4.2009, to all concerned agencies and thereafter in its hearing held on 21.07.2009, the BIFR sanctioned the MDRS with the impugned directions. Hence, this appeal.

[3] The learned Counsel for the Appellant company has challenged the impugned order on the following grounds:

(a) Though the IDBI (OA), in respect of sugar development fund (SDF) loan, had recommended waiver of the entire interest, additional interest, penalty or any other charges and proposed reschedulement of loan in, accordance with position as shown in the cash flow of the MDRS, the BIFR passed the impugned directions based on incorrect submissions of the sugar directorate.

(b) As per Rule 24 of SDF rules, the interest on restructured; loan carries simple interest @ 4% per annum and not 6% per annum as has been submitted by the sugar directorate before the BIFR. The interest rate applicable is governed by Notification No. GSR 687(E).

(c) The IFCI Limited, acting as agent on behalf of the Ministry of Construction Affairs, Food and Public Distribution, has charged interest @ 4% only for SDF loan of 885.60 lakhs taken by the Appellant company and has charged penal rate of interest @ 2.5% on default of payment. Therefore, the contention of the sugar directorate that the penal rate of interest on default of payment on SDF loan is 4% is contrary to Rule 25 of the SDF rules.

(d) The Government of UP has already waived of the interest of Rs. 998 lakhs accrued on the loan disbursed by them to the Appellant company. Therefore, the BIFR should have given the concessions and reliefs as prayed for by the Appellant company.

(e) The BIFR erred in not sanctioning the proposed reliefs and concessions on the ground that the rules do not permit the reliefs and concessions proposed. Whereas under the provisions of SICA, the BIFR has powers under Section 32 of SICA to grant the said reliefs and concessions overriding the provisions of SDF Rules, 1983, Sugar (Control) Order, 1966 (hereinafter referred to as 'Control Order') and Levy Sugar Supply (Control) Order, 1979 (hereinafter referred to as 'Levy Sugar Order').

(f) The BIFR failed to appreciate that in Case No. 359 of 2004 of Kanoria Sugar and General Manufacturing Co. Ltd. it exempted the sick company from monthly release quota system and from levy obligation under levy sugar order, in the aforesaid case, the BIFR has also directed the Government to waive the interest on the SDF loans and agree to collect the principal outstanding over a period of time as per the fund flow circulated with DRS. The BIFR has also further directed that if the Government does not agree to collect its principal dues 'in the SDF loan in a phased manner as proposed in the DRS/the dues of SDF reckoned at principal plus interest computed on simple interest basis for the loan period without penalty would be frozen and paid at the end of the scheme period.

[4] The representative of the Directorate of Sugar,' Department of Food and public Distribution, submitted that Rule 26 of the SDF rule, 1983, regulates restructuring of loans of potentially viable sick sugar undertakings under which rare is no provision of waiver of simple interest. However, reschedulement of principal and outstanding interest, capitalized as principal may be considered. the further argued that the repayment of outstanding dues cannot also be on interest free basis as there is no provision for the same. He also submitted that under Rule 26 of SDF rule, 1983, the restructured loan shall carry a simple interest equivalent to the prevailing 'bank rate' which at that point of time was 6% per annum from the date of implementation and in case of default in repayment an additional interest @ 4% per annum on the amount of default shall be payable. He further submitted that there is no provision for exemption to any sugar mill from she sale of sugar on the basis of monthly release quota system, as per order notified, vide notification No. GSR 345(E)/Es. Com./Sugar dated 4.6.1979 issued under the provisions of the Sugar (Control) Order, 1966, and exemption from levy obligation under Levy Sugar Supply (Control) Order, 1979 to any sugar mill except for those sugar mills which were covered under the erstwhile incentive scheme for a specific period as mentioned in their incentive certificate.

[5] We have considered the submissions of tine parties and have perused the record of this case. In order to appreciate modifications that were carried out to tine reliefs and concessions proposed at paragraph 12.6(a)(1)(2) and (3) of the MDRS, we consider it necessary to quote tine said paragraphs:

12.6 From Central Government (a) (Sugar Directorate, Government of India, Ministry of Consumer Affairs, Food & PD, Department of Food & PD, Directorate' of Sugar, Krishi Bhawan, New Delhi.

(1) To consider waiving entire interest, penalty and any other charges by whatever name called, charged or chargeable with respect to the term loan of Rs. 885.60 lakh and to accept the outstanding principal amount of the said term loan amounting to Rs. 885.60 lakh in full and final settlement of all the claims of SDF against the company. The said principal amount shall be paid by tine company over a period of 5 years commencing from 2011-12 in equal annual installments on interest free basis.

(2) to exempt from the sale on the basis of monthly release; quota system as per order under Sugar (Control) Order 1966 and other relevant/statutory provisions.

(3) To exempt from tine sale of sugar under Levy Sugar Supply (Control) Order, 1979, during tine rehabilitation period.

[6] In respect of tine above proposed reliefs and concessions, the BIFR, vide its impugned order dated 21.07.2009, issued tine following directions:

16(c) Regarding restructuring of loans, there is no provision for waiver of simple interest, in the SDF rules 1983. However, reschedulement of principal and outstanding interest capitalized as principal should be considered.

(d) Paragraph 12.6(a)(2)

As there is no provision for exemption to any sugar mill from tine sale of sugar on the basis of monthly release quota system as per order notified vide notification No. G.S.R. 345(E)/Es. Com/Sugar dated 4.6.1979, the sale of sugar by the company on tine basis of monthly release quota system would continue to be regulated by aforesaid order as well as other relevant orders statutory provisions of the Central Government, and the State Government in the regard. This is applicable also to other concessions requested by the company in this sphere.

(e) Paragraph 12.6(a)(3)

As there is no provision for exemption from levy obligation under Levy Sugar Supply (Control) Order, 1979, hence no exemption can be granted to the Company from levy obligation.

[7] Paragraph 12.6(a)(1) of the MDRS enjoins upon the Sugar Directorate, Government of India to consider the waiving of interest, penalty, any other charges on the SDF term loan of Rs. 885.60 lakh. However, in the Sanctioned Scheme (SS) there is absolutely no mention of the waiver of interest, penalty, charges etc. Paragraph 12.6(a)(1) of the SS again directs the Sugar Directorate to consider to accept payment of principal amount of the term loan of Rs. 885.60 Lakhs outstanding and interest capitalized as principal. It is evident, therefore, that in the MDRS as well as in the SS, the proposed reliefs are only for consideration and not for sanction of the same. However, we find that the title of the rehabilitation scheme as sanctioned for implementation by all concerned by a Subsequent order dated 14.09,2009 instead of showing that it is a sanctioned Scheme again shows that it is an MDRS. Besides, when the draft rehabilitation Scheme was prepared by the OA and circulated by the BIFR, the proposal for waiver of outstanding interest, penalty and charges was only proposed to be considered by the Directorate of Sugar which would mean that, after consideration, the Directorate of Sugar may either accept or reject the proposal. However, the OA factored in the waiver of the entire outstanding interest of Rs. 19.54 lakhs on SDF loan in the projected profitability statement, projected cash low statement as well as the restructured balance sheet in the MDRS. The proposed rehabilitation strategy in the MDRS envisaged waiver of outstanding interest of Rs. 619.54 lakhs on SDF loan and repayment of the principal SDF loan of Rs. 885.60 lakhs over a period of five years in equal annual installments, commencing from fourth year of rehabilitation from cut-off date, i.e., from the Y. 2011-12 onwards, on interest free basis. In these circumstances, it is not clear why in the profitability projections of the Appellant company waiver of outstanding interest on SDF loan was factored in at all when the provision in the MDRS was only consideration of the relief. Besides, since in the SS, waiver of outstanding interest has not been sanctioned by tine BIFR and the Directorate of sugar, Government of India, has only been directed to consider accepting the payment of principal amount of the SDF term loan of Rs. 885.60 lakhs outstanding and interest capitalized as principal, the projected profitability and the projected cash flow statements should have also been modified. Accordingly, the projected profitability of the Appellant company during the rehabilitation period without waiver of the outstanding interest on SDF loan would be adversely affected. We find in tine SS that the proposed rehabilitation strategy still includes waiver of interest of Rs. 619.54 lakhs on SDF loan and the balance sheet after restructuring as on cut-off date 01.10.2008 (annexure-VI) also shows waiver the interest of Rs. 619.54 lakhs. Similarly the profit and loss account after restructuring ( annexure -VII) of the SS shows waiver of interest accrued on SDF loan as Rs. 619.54 lakhs. Therefore, we find a total mismatch of what has been sanctioned in paragraph l2.6(a)(l) of the SS and the projected, profitability, cash flow statement and restructured balance sheet of the Appellant company. If the waiver of interest as indicated above is not granted then the BIFR must assess whether the rehabilitation scheme would at all be viable and ii it is found viable then how it will affect the profitability of the Appellant company during the rehabilitation period.

[8] We also find that in the SS, tine BIFR did not agree to exempt the Appellant company from the regime of monthly release quota system and levy obligation. The IDBI which is the OA in this case has filed an affidavit stating that in the projected profitability attached to the-SS of the Appellant company, sale of sugar under Levy Sugar (Control) Order 1979 @ 10% and remaining 90% as free sale sugar was factored in separately. Subsequently, the Government of India has increased the quantum of levy sugar from 10% to 20%. OA has also stated in the affidavit that so far as the monthly release quota system is concerned, the release orders by the Government of India are not decided in advance and vary according to the production by each sugar mill as well as the consumer demand of sugar in the market. Therefore, the sale of sugar by the company was factored in the projected profitability statement on the basis of l/12th of the total production during the season as sale per month during the whole year. We also find from the basic assumptions underlying the scheme (annexure-III) attached to the SS that the selling prices of levy sugar and free sugar have been separately taken into consideration on the prevailing prices as Rs. 13307.70/MT and Rs. 19500/MT, respectively. Therefore, contrary to the arguments of the learned Counsel for the Appellant company, it is established that exemption from the obligation of levy sugar was never factored in either in the MDRS or the SS. Similarly, we find that although it is not possible for the OA to project the actual quantum of release by the Government of India on the basis of monthly release quota system, yet the OA did factor in monthly release of sugar on the basis of l/12th of the total production during the season as sale per month during the whole year in the projected profitability statement. However, what is mystifying is the fact that while the MDRS envisaged exemption from sale on the basis of monthly release quota system as well as on the basis of exemption from the sale of sugar under levy sugar order, the OA still did not factor in both the exemptions as stated above in the profitability statement attached to the MDRS Similarly, when the BIFR, vide its impugned order, refused to exempt the Appellant company from the sale of sugar on the basis of monthly release quota system and from levy obligation under levy sugar order, then the OA failed in revise the projected profitability statement by factoring in levy sugar obligating 20% instead of 10%. However, in respect of the monthly release quota system release of sugar at l/12th of the total production, could only have been (sic) in the projected profitability statement as it is not possible to project the (sic) releases over the rehabilitation period which vary according to production as well as consumer demand. Nevertheless, the underlying assumption of 1/12th release per month is still a system of monthly release of sugar though not based on actual releases but on the basis of a uniform rate of release, it is clear therefore, that the SS has not been recast as per the directions: given in the impugned order even though the reliefs and concession which have not been granted by the BIFR, i.e., waiver; of interest on tine SDF loan, exemption from levy obligation @ 20% and monthly release quota system, have a negative impact on the profitability and sustained revival of the Appellant company. In effect, there is absolutely no clarity in respect of the viability of the SS as well as the profitability projections for the company made in tine SS.

[9] The learned Counsel for the Appellant company has also pointed out that the impugned directions of tine BIFR are discriminatory because in the case of Kahoria Sugar and General Manufacturing Co. Ltd. (Case No. 359 of 2004), the BIFR had sanctioned the scheme of rehabilitation, vide order dated 14.6.2007, wherein the said, sick company was exempted from sale of sugar under the levy sugar order during the period of rehabilitation scheme as well from the sale on the basis of monthly release quota system. He also pointed out that in the case of Kanoria Sugar and General manufacturing Co. Ltd., the BIFR had also directed that the Government should waive the interest on SDF loan and agree to collect the principal outstanding over a period of time as per tine fund flow circulated with DRS. The BIFR, in the said case, also ordered that in tine event of the Government not agreeing to collect its principal dues in the SDF loan in a phased manner as proposed in the DRS, the dues of SDF reckoned at principal plus interest computed on simple interest basis for the loan period without penalty would be frozen and paid at tine end of scheme period. However, the learned Counsel pointed out that, in the present case, tine BIFR has treated the Appellant company differently which amounts to discrimination vis-a-vis similarly placed companies. A copy of the SS, in respect of Kanoria Sugar and General Manufacturing Co. Ltd. BIFR's case No. 359 of 2004), has been submitted by the Appellant company.

[10] The perusal of the aforesaid order in Kanoria Sugar case confirms that indeed waiver of interest on SDF loan, exemption from sale of levy sugar under levy sugar order and exemption from sale on the basis of monthly release quota system were granted by tine BIFR. However, we are of opinion that grant of reliefs and concessions in respect of a particular sick company depends upon the Projections of profitability for a particular company under a rehabilitation Scheme. In our opinion, tine BIFR, in tine instant case, should have considered the impact of not granting tine reliefs and concessions proposed in the DRS and then should have taken a decision accordingly. However, we find that the BIFR has Refused the grant of certain reliefs and concessions proposed in tine MDRS without assessing tine impact of such refusal on the projected profitability of the Appellant company. The BIFR has failed to revise/recast the projected profitability statement, cash flow statement and restructured balance sheet attached to the SS and has failed to reassess the viability of the rehabilitation scheme consequent on such modifications.

[11] It is evident from the impugned order that the BIFR did not sanction the reliefs and concessions proposed in the MDRS on the ground that the provisions of SDF Rules, 1983, notification dated 4.6.1979 issued under Control Order and provisions of levy sugar order do not provide for the same. However, Section 32 of SIC A clearly lays down that the provisions of SICA and of any rules or schemes made thereunder shall have effect notwithstanding anything inconsistent therewith contained in any. other law except the provisions of the Foreign Exchange Regulation Act, 1973 and the Urban Land (Ceiling and Regulation) Act, 1976, for the time being in force or in the memorandum or articles of association of an industrial company or in any other instrument having effect by virtue of any law other than SICA. It is clear from the above provisions that the scheme sanctioned under SICA shall override the provisions of SDF rules, control order and levy sugar order notwithstanding the fact that the reliefs and concessions sanctioned in the scheme are inconsistent with the provisions of the aforesaid orders issued under the Essential Commodities Act, 1955. Therefore, if the BIFR was convinced that for the rehabilitation of the Appellant company, it was necessary and imperative to grant the reliefs and concessions sought in the MDRS, it could have sanctioned the same in the rehabilitation scheme considering the fact that as per the non obstante clause in Section 32 of SICA, the provisions of the SS would override the provisions- of SDF rules, control order and levy sugar order. Therefore, we are of the opinion that lack of provisions in the SDF rules, control order and levy sugar order were not hurdles for sanction of the aforesaid reliefs and concessions, if otherwise, the BIFR was convinced that without sanction of the said concessions, the profitability of the Appellant company for the period of rehabilitation would be adversely affected and the rehabilitation scheme would be a non-starter. We are of the opinion that the BIFR did not properly assess and appreciate the impact of the denial of the said reliefs and concessions contained in the impugned directions on the sustained revival of the company.

[12] In above view of the matter, we allow this appeal and set aside the impugned directions contained in paragraphs 16(c), (d) and (e) of the impugned order and remand the case to the BIFR to reconsider afresh the reliefs and concessions envisaged in paragraphs 12.6(a) (1), (2) and (3) of the MDR5 after giving an opportunity of hearing to the Appellant company as well as all the concerned parties keeping in view the observations made above.

M.As in the Appeal

[13] The Appellant company has filed M.A. No. 23 of 2010 for stay of operation of the release order dated 1.12.2009 issued by the Ministry of Consumer Affairs food & Public Distribution, Department of Food and Public Distribution Directorate of Sugar) qua the applicant company till the pendency of the present appeal. However, in its M.A. No. 164 of 2010, filed in this appeal,, the applicant has mentioned that as interim orders were awaited on M.A. No. 23 of 20J0, the applicant has complied with the order dated 1.12.2009 without prejudice to its rights and contentions. In view of the fact that the release order dated 1.12.2009 has been complied with and this appeal has been disposed of, M.A. No. 23/2010 has become infructuous and is accordingly disposed of.

[14] The Appellant company has also filed an M.A. No. 164 of 2010 praying for directions to the effect that the Appellant/applicant would not have to comply with the issued by the Government of India qua the applicant company requiring the company to release levy sugar under Levy Sugar Supply (Control) Order, 1979 during the pendency of the present appeal. Since, we have allowed the appeal and have set aside the impugned directions of the BIFR, this M.A is disposed of with the direction that the Appellant will be at liberty to file an application before the BIFR, seeking the same interim relief during the pendency of the proceedings before the BIFR.

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