BEFORE THE APPELLATE AUTHORITY FOR INDUSTRIAL AND FINANCIAL RECONSTRUCTION

Appeal

238 of 2009

T S SANIL (RE: TCM LTD AND OTHERS) - Complainant(s)

Versus

BIFR AND OTHERS - Opp.Party(s)

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

14 Jan 2011

ORDER

[1] T.S. Sanil, the appellant, has filed this appeal under section 25 of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) against the order dated 28.11.2008 passed by the Board for Industrial and Financial Reconstruction (BIFR) in reference Case No. 101/2005 whereby BIFR has passed the following order:

8 Keeping in view the foregoing, the facts and circumstances of the case, the bench hereby accords its approval to the company (TCM Ltd.) to enter into an agreement with Godrej Properties Ltd (GPL) for development of a suitable project utilising the company's vacant and surplus land at Kalamassery unit for development of infrastructure/IT park/residential project subject to the following:

(i) The real estate development project will not form a part of the DRS or will be included as a long term activity by the company for revival.

[2] Brief facts of the case are that based on its audited balance sheet (ABS) as on 30.9.2004, the respondent company TCM Limited filed a reference with the BIFR, under section 15(1) of SICA. In the hearing held on 6.2.2007, the BIFR declared the company a sick industrial company as on 30.9.2004 in terms of section 3(1)(o) of SICA and appointed Bank of Baroda (BoB) as the operating agency (OA) under section 17(3) of SICA with the directions to prepare a revival scheme for the company.

[3] In the hearing held on 17.10.2007, the BIFR issued directions to the company under section 22A of SICA not to dispose of, lease out, encumber or alienate in any manner any of its fixed or current assets without the specific approval of the BIFR. However, if the unit/units were working, the current assets could be utilised for incurring day-to-day expenses, subject to keeping appropriate records thereof. In the same order, the BIFR also issued the following directions:

(ii) As the company's land was proposed to be sold, the company would obtain a valuation from a Government approved valuer so that the correct reserve price can be fixed.

(iii) For sale of any of its assets, the company would have to go through a transparent procedure after inviting bids from interested parties. Any sale of assets would form a part of the company's DRS and would have to he made through an ASC which would be appointed. Meanwhile, the company would not go ahead with sale of land mentioned in para 5 and 6 in the proceedings." (Emphasis supplied)2

[4] Thereafter, in the hearing held on 4.11.2008, the BIFR observed that the company had not obtained clearance/permission of the Board for an agreement entered into with Godrej Properties Limited (GPL) and this fact has also not been brought to the notice of the BIFR. The BIFR further observed that the company had also not submitted as to how they have identified GPL as their partner: through a competitive bidding process or by a committee of bankers or by the company. Therefore, the BIFR issued the following directions:

(i) The company would submit their written submission as to why the company should, in view of its development proposal, continue to remain under SICA. It would also clarify the process by which Godrej was identified for the development project;

(ii) BoB (OA) would not charge interest on delayed payment with effect from 31.10.2008 till the next date of hearing or the directions of the bench on the company's application dated 27.10.2008 are issued.

[5] Thereafter, in the hearing held on 18.11.2008, the BIFR issued the following directions:

(i) As assured by the learned counsel, the company will submit the written submissions along with the case laws/precedents wherein the Board had earlier accorded permission to sick companies earlier for development of land of unviable unit.

(ii) BoB (OA) will examine the DRS submitted by the company and will submit a status report within one week.

[6] Thereafter, the BoB (OA), vide its letter dated 4.11.2008, had requested the BIFR that the company may be allowed to enter into an agreement for transfer of property as it has taken an advance of Rs. 20 crores for settling the dues under QTS to the bankers and to the Kerala State Electricity Board (KSEB). Thereafter, on 24.11.08, the learned counsel for the company cited three cases in which the BIFR has permitted the sick company to undertake development of land under the sanctioned scheme/modified sanctioned scheme. The learned counsel for the BoB had also requested the BIFR to permit the company to enter into an MoU with GPL and also direct the OA to process the DRS. On the basis of the aforesaid submissions, the BIFR granted approval to the company to enter into an agreement with GPL for development of a suitable project and further held that the real estate development project will not form part of the DRS. Against this direction, the appellant has filed this appeal.

[7] In this appeal, Shri Alok Dhir, learned counsel appearing for the appellant, submitted that the appellant is one of the shareholders of the respondent company, TCM Limited, and is holding 1.5 lakh shares of TCM. The respondent company was incorporated in the year 1943 under the name of Style of Travancore Chemical and Manufacturing Company Limited by the Nobel Laureate, Sir C.V. Raman, and Dr. Krishnamurthi. TCM is engaged in the manufacture of various types of chemicals and it has four units located at Kundara and Kalamassery in Kerala and Salem and Tuticorin in Tamil Nadu. On account of the decrease in the sale of chloriate, the main units of TCM were gradually closed and the respondent company suffered heavy losses. In the year 2005, pursuant to filing the reference, one Mr. John Varghese acquired 14.63% shares of TCM and compelled the existing directors on the board of the company to resign and forcefully took control of the management of TCM. The present management of TCM is not at all interested in the revival of the company but is only interested in selling the assets of the company and just after taking control of TCM, the new management has entered into an agreement with Triton Hi-Tech (Farms) (P) Ltd. on 31.7.2006 for sale of its 107 acres of land at Villupuram, Tamil Nadu, without disclosing the pendency of the reference with the BIFR. Vide order dated 17.10.2007, the BIFR has restrained TCM under section 22A of SICA from selling, alienating or leasing any of its assets without the prior approval of the BIFR. The BIFR further directed TCM to obtain a valuation from a government approved valuer to ascertain the correct reserve price of the land proposed to be sold by TCM and observed that the sale of any asset would be through a transparent procedure after inviting bids from interested parties and any sale of assets would form a part of the DRS and have to be made through an ASC to be appointed by the BIFR. The hon'ble Company Law Board (CLB), vide its order dated 27.9.2006 in Company Petition No. 93 of 2006, had also directed that no assets of the respondent company, TCM, would be sold except with the prior permission of Company Law Board and, in the year 2007, Mr. John Varghese made a public offer to acquire the shareholding of TCM, wherein in clause 5.2 of the offer, he had given an undertaking that no assets of TCM would be sold without the prior approval of shareholders of TCM. It was further declared that they had no plans to sell or dispose of or encumber any asset of TCM.

[8] Shri Dhir further submitted that the impugned order has been passed in violation of the principles of natural justice. The appellant, as the shareholder, is directly affected by the order passed by the BIFR and he was not heard before the impugned order was passed. It is further submitted that the appellant sought a hearing in view of the following facts which are suppressed from the BIFR:

(a) Under section 293(1)(a) of the Companies Act, the company cannot sell its assets without a resolution being passed in a meeting attended by shareholders approving such sale;

(b) Section 18(2)(k) of SICA provides for sale of assets by the company under a scheme which is required to be published in newspapers as contained under section 18(3) (a) of SICA which is only to ensure that any party which is affected by such a scheme or sale envisaged therein would be able to make its objections before the BIFR;

(c) A hearing was also warranted in view of the undertaking given by Mr. Joseph Varghese, present MD of the company to the shareholders of the company on 19.2.2007 in the public announcement as per clause 5.2 of the public offer, which reads as under:

5.2. The Acquirers do not have any plans to dispose off or otherwise encumber any assets of TCM in the succeeding two years from the date of closure of the offer, except in the ordinary course of business as may be permissible. They undertake that they shall not sell, dispose off or otherwise encumber any substantial assets of the target company except with the prior approval of the shareholders.

This announcement was applicable for a period of two years.

(d) In the corrigendum issued by the company on it was further undertaken in clause 3.11 that the acquirer group, i.e., the managing director and his associates, shall not sell, dispose off or otherwise encumber any substantial assets of the company except with the prior approval of the shareholders of the company. As per clause 3.13 this undertaking was also applicable for a period of two years from the date of closure of the offer, i.e., 2.4.2008, which, in effect, means that, till 2.4.2010, no assets of the company could have been sold except with the prior approval of its shareholders, which was not done in the present case.

[9] It was argued on behalf of the appellant that the appellant is a necessary party who should have been heard by the BIFR before permitting the company to proceed with the sale of its assets. It was further argued and submitted that, while passing the impugned order and granting permission to TCM to enter into an agreement with GPL, the BIFR has not assigned any reasons, whereas the respondent company was restrained under section 22A of SICA by a specific order not to dispose of its property. The BIFR, thus, without assigning any reason has granted permission which is contrary to the provisions of SICA. Till now no scheme has been framed by the BIFR and the BIFR has no power to review its earlier orders. Even by the impugned order, the BIFR has illegally directed that the real estate development project will not form a part of the DRS which is not only contrary to the spirit of SICA but also arbitrary and without jurisdiction as such an order cannot be passed ignoring and reviewing the earlier specific orders.

[10] In his written submissions, learned counsel for the appellant submitted that the managing director of the respondent company after change of management on 19.1.2006 has:

(i) Sold out the plant and machinery of Kalamassery unit in 2006-07; (ii) Entered into agreement with Tritan for Ulendrapet Land on 31.7.2006 for Rs. 2 crores;

(iii) Entered into an agreement on 22.8.2010 to sell Kundra land;

(iv) In 2008 entered into an agreement with GPL for sale of Kalamassery unit.

It was further argued that the acquisition of power by Shri Varghese was in violation of SEBI Takeover Code as well as guidelines issued by the BIFR. While granting permission, the BIFR did not place on record the relevant facts and has also not considered that any sale or development of land can only be permitted in terms of a sanctioned scheme.

[11] In reply, learned counsel for the respondent TCM submitted that, on 16.9.2005, Shri Joseph Varghese, Shri Tirugnanam and Shri M. Lokanadhan together purchased 14.9% shares from WIMCO. On 11.2.2005, Joseph Varghese moved an application for exemption from applicability of the SEBI Takeover Code. It is admitted by the respondent that the appellant had purchased 5000 shares in the company on 30.9.2005. On 21.10.2005, the appellant applied under section 257 of the Companies Act to become a director of the company. The appellant is admittedly a promoter of a construction company called Silpa Constructions in Kerala involved in building large scale projects and is also interested in usurping the lands of the respondent company. It is admitted that, on 28.11.2005, the Company Law Board (CLB) stayed the sale of assets. In the AGM held on 31.12.2005, Joseph Varghese was elected as the director of the company. The appellant's application for appointment as a director was rejected as no member proposed his name and he was not even present in the AGM either on 22.11.2005 or on 31.12.2005. Thereafter, Joseph Varghese was appointed as the managing director of the company on 19.1.2006. It is submitted that the structure of Kalamassery unit proved to be dangerous as a result of which plant and machinery of the unit had to be disbanded. A subsequent sale was done for Rs. 3.10 crores with the consent of the workers and a joint bank account was opened and the money was used for the purpose of settlement of dues of the workers. He has further admitted that on 31.7.2006 an agreement for sale was entered into with Tritan for sale of Ulendrapet land having a validity of 3 months for a sum of Rs. 2 crores and this was approved by the AGM on 30.7.2006. The company then entered into another agreement for Ulendrapet land for Rs. 2.5 crores on 17.4.2007 subject to the approval of the BIFR with Shri K. Sadagopan and Shri R. Vijay Kumar. However, the same was cancelled on 20.8.2007. Meanwhile, on 22.8.2007, the agreement of sale was entered into for sale of Kundara land. It is further submitted that on 17.10.2007, the BIFR passed direction under section 22A of SICA and on 15.2.2008, the company entered into a development agreement with GPL for the development of property of Kalamassery unit subject to the approval of the BIFR. It is further submitted that in the present appeal, the appellant has challenged the development agreement with GPL after the said company has paid Rs. 19.75 crores which has been utilised to settle the dues of all the secured creditors. None of the secured creditors or the OA is supporting the appeal. It was argued and submitted that the appellant does not have locus to file the present appeal.

[12] We have heard the arguments of the learned counsels for the parties and have also perused the impugned order as well as the material on record. First of all, we need to consider whether the BIFR was justified in granting approval to the respondent company, TCM Limited, to enter into an agreement with GPL for development of a suitable project utilising the company's vacant and surplus land at Kalamassery unit for development of infrastructure/FT Park/residential project and directing thereby that the real estate development project will not form part of the DRS or will not be included as a long term activity by the company for revival. In our considered opinion, such a finding/direction cannot be said to be either legal or logical. Section 18 of the SICA clearly provides that where an order is made under section 17(3) in relation to any sick industrial company, the OA as specified in the order shall prepare, as possible and ordinarily within a period of 90 days from the date of such order, a scheme with respect to such company providing for any one or more of the measures specified and section 18(2)(d) lays down that any scheme, may provide for sale or lease of a part or whole of any industrial undertaking of the sick Industrial company, and section 18(2) clearly provides that the scheme referred to in sub-section (1) may provide for any or more of the measures specified thereunder. Section 18(2)(1) provides for sale of the industrial undertaking of the sick industrial company free from encumbrances and all liabilities of the company or other such encumbrances or liabilities as may be specified, to any person including any cooperative society formed by the employees of such undertaking and fixing of such reserve price for such a sale and provides for leasing of the industrial undertaking of such company. Thus, from the above provisions of section 18(1) and 18(2) of SICA, it is clear that sale or lease of a part or whole of any industrial undertaking of a sick industrial company has to be a part of the scheme to be prepared by the OA and to be approved by the BIFR.

[13] In this case, it is an admitted fact that the OA has not prepared any scheme for the revival of the company nor has the appellant company submitted any proposal for preparing a scheme by the OA. It is noteworthy that the BIFR, vide its order dated 17.10.2007, has issued a direction under section 22A of SICA to the company not to dispose of, lease out, encumber or alienate in any manner any of its fixed or current assets without the specific prior approval of the BIFR. Therefore, in view of the aforesaid rider, it was necessary for the BIFR to direct the company to submit proposals for preparation of a revival scheme by the OA and thereafter to direct the OA to submit a scheme. But, Instead of doing so, the BIFR started considering the request of the company for permission to sell its assets. In fact, any sale or grant of lease of a part or whole of any industrial undertaking of the sick industrial company should be a part of the scheme to be sanctioned by the BIFR and the company cannot dispose of any asset of the company without the permission of BIFR de hors scheme and, therefore, the aforesaid transfer cannot be held to be valid. However, instead of proceeding on the legal lines as specified under section 18(1) and 18(2) of SICA and approving a scheme for rehabilitation, the BIFR granted permission and regularised earlier transaction of the respondent company which cannot be done and said to be legal. It is true that before granting approval to the respondent company, the BIFR has neither considered any proposal regarding sanction of a scheme nor has considered the viability of the company. The sale of asset of a sick industrial company has to be necessitated by the dynamics of a DRS which will indicate the means of finance required for implementation of such a scheme.

[14] Sub-Clause (k) of section 18(2) of SICA also clearly provides that the method of sale of the assets of the industrial undertaking of a sick industrial company should be by public auction or by inviting tenders or by any manner as may be specified. But we have observed from the impugned order that instead of resorting to the aforesaid measures, the BIFR has granted approval regarding sale of the land without following a transparent procedure as envisaged in section 18(2)(k) of SICA. When restriction on the sale of land was already imposed under section 22A of SICA, such a relaxation could not have been provided without a sanctioned scheme. More so, the BIFR has committed error of reviewing its own earlier order as under SICA the BIFR has no power to do so.

[15] On the question of locus, we have examined the matter. The appellant is a shareholder and has every right to file any objection or an appeal. Therefore, we are of the view that the appellant has locus to file this appeal and also has the locus to object to the proposed scheme as a shareholder if his rights are affected. During the course of the argument, it was pointed out that the managing director of the respondent company himself has undertaken in clause 5.2 of the public offer that they shall not dispose of or otherwise encumber any substantial assets of the target company except with the prior approval of the shareholders of the company. Therefore, according to the undertaking itself, the assets of the company cannot be sold.

[16] It has also been argued on behalf of the appellant that under section 293(1)(2) of the Companies' Act, the company could not have sold its assets without getting it approved by the shareholders in a general meeting. Since the above said dispute is already pending before the Company Law Board, it will not be proper for us to record any finding which may directly or indirectly affect the dispute pending before the Company Law Board.

[17] Considering the totality of the facts and circumstances of the case, we are of the view that while granting permission the BIFR has erred in not formulating or sanctioning a scheme including sale/development of assets, if any, as part of the scheme. We are also of the view that the appellant has locus to file this appeal as a shareholder. So far as the question of limitation is concerned, since the appellant was not a party before the BIFR, the limitation starts from the date of receipt of copy of the impugned order. Therefore, this appeal from the date of the receipt of the order has been filed in time.

[18] In view of the above reasons, the impugned order is bad in law. Besides, the direction that the real estate project will not form part of the DRS nor will it be included as a long term activity by the company for its revival is untenable. There is no legal justification for keeping the real estate development project out of the DRS. In fact no reason has been assigned by the BIFR as to why such a real estate project shall not be included as a long term activity of the company and should not be part of the DRS. Any activity which generates funds for the revival of the company should form part of the DRS.

[19] Thus, this appeal is allowed and the impugned order dated 28.11.2008 is set aside and it is directed that any sale or real estate development project will form part of the DRS and assets, if any, shall be sold through ASC as directed earlier and any long term activity of the company from which funds are generated will also form part of the DRS and funds will only be used for the revival of the company. We also direct the OA to prepare a revival scheme for the appellant company and submit it to the BIFR within 45 days from the date of communication of this order. Thereafter, the BIFR shall proceed further expeditiously to sanction a scheme, if possible, within a further period of 90 days.

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