Legal Blog: 'Inquiry' under the SICA : The Law

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Saturday, February 12, 2011

'Inquiry' under the SICA : The Law

B.D. Ahmed
The Delhi High Court in a recent decision, in Dwarikadhish Spinners Ltd. v. UCO Bank & Ors., has examined the scope and nature of inquiry under the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985. In the case at hand, the question raised before the Hon'ble court was whether a unilateral inquiry could be conducted by any creditor, not being an operating agency under the act, and whether such inquiry / report can be relied upon by the BIFR without independent application of mind. The Court held as under;


We find that as per the statement of objects and reasons of SICA, it has been designed to take care of not only those sick industrial companies which are potentially viable and can be revived and rehabilitated but also of the non- viable sick industrial companies. The potentially viable sick industrial companies are sought to be revived and rehabilitated under SICA whereas the non-viable sick industrial companies are to be dealt with under Section 20 of SICA in order to salvage the productive assets and realize the amounts due to the banks and financial institutions through liquidation of such companies. Before either eventuality is undertaken, the BIFR has been given the duty under the Act to determine whether an industrial company has become a sick industrial company or not. The expression sick industrial company is defined in Section 3(1)(o) as under:

"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."

It is apparent from the above definition that an industrial company, which has, at the end of any financial year, accumulated losses equal to or exceeding the entire net worth of the company would be termed as a sick industrial company. When an industrial company becomes sick, a duty is cast upon the Board of Directors of that company under Section 15(1) to, within sixty days from the date of finalization of the duly audited accounts of the company for the financial year as at the end of which the company has become sick industrial company, make a reference to BIFR for determination of the measures which are to be adopted in respect of the said company. We find that by virtue of Section 15(2), the Central Government or the Reserve Bank or a State Government or a public financial institution or a State level institution or a scheduled bank may, without prejudice to the requirement of the Board of Directors of an industrial company which has become sick to make a reference to the BIFR within Section 15(1), can also make a reference in respect of a company in respect of which there are sufficient reasons to believe that it has become a sick industrial company. Thus, it is clear that a reference to BIFR can be made either by the Board of Directors of the company itself or by the Central Government, RBI etc. under Section 15(2).

10. Section 16 is of material significance and, as such, it would be appropriate to set out the same:-

"16. INQUIRY INTO WORKING OF SICK INDUSTRIAL COMPANIES.

(1) The Board may make such inquiry as it may deem fit for determining whether any industrial company has become a sick industrial company -

(a) upon receipt of a reference with respect to such company under section 15; or

(b) upon information received with respect to such company or upon its own knowledge
as to the financial condition of the company.

(2) The Board may, if it deems necessary or expedient so to do for the expeditious disposal of
an inquiry under sub-section (1), require by order any operating agency to enquire into and make a report with respect to such matter as may be specified in the order.

(3) The Board or, as the case may be the operating agency shall complete its inquiry as expeditiously as possible and endeavour shall be made to complete the inquiry within sixty days from the commencement of the inquiry.

Explanation: For the purposes of this sub section, an inquiry shall be deemed to have commenced upon the receipt by the Board of any reference or information or upon its own knowledge reduced to writing by the Board.

(4) Where the Board deems it fit to make an inquiry or to cause an inquiry to be made into any industrial company under sub-section (1) or, as the case may be, under sub-section (2), it may appoint one or more persons to be a special director or special directors of the company for safeguarding the financial and other interests of the company or in the public interest.

(4A) The Board may issue such directions to a special director appointed under sub-section (4) as it may deem necessary or expedient for proper discharge of his duties.

(5) The appointment of a special director referred to in sub-section (4) shall be valid and effective notwithstanding anything to the contrary contained in the Companies Act, 1956 (1 of 1956) or in any other law for the time being in force or in the memorandum and articles of association or any other instrument relating to the industrial company, and any provision regarding share qualification, age limit, number of directorships, removal from office of directors and such like conditions contained in any such law or instrument aforesaid, shall not
apply to any director appointed by the Board.

(6) Any special director appointed under sub- section (4) shall -

(a) hold office during, the pleasure of the Board and may be removed or substituted by any person by order in writing by the Board;

(b) not incur any obligation or liability by reason only of his being a director or for anything done or omitted to be done in good faith in the discharge of his duties as a director or anything in relation thereto;

(c) not be liable to retirement by rotation and shall not be taken into account for computing the number of directors liable to such retirement;

(d) not be liable to be prosecuted under any law for anything, done or omitted to be done in good faith in the discharge of his duties in relation to the sick industrial company."

11. A plain reading of Section 16(1) of SICA would indicate that the prime duty of the BIFR in making an inquiry is for the purpose of determining whether an industrial company has become a sick industrial company or not. Of course, sub-section (1) of Section 16 has two parts. Clause (a) of Section 16(1) refers to a situation where the Board embarks upon an inquiry upon receipt of a reference under Section 15 of SICA. We may recall that the reference under Section 15 may be made either at the instance of the Board of Directors of the company which purports to be a sick industrial company or under Section 15(2) at the instance of the Central Government, Reserve Bank etc. where such institution has sufficient reasons to believe that an industrial company has become a sick industrial company. Clause (b) of Section 16(1) contemplates an inquiry in a situation where the BIFR undertakes such inquiry upon information received with respect to a company or upon its own knowledge as to the financial condition of such a company. In either eventuality, that is, either upon receipt of a reference or upon information, the BIFR has to make an inquiry for determining whether the industrial company in question has become a sick industrial company or not. Of course, the type and kind of inquiry that the BIFR has to make has been left to the BIFR, inasmuch as the expression used is :- "the Board may make such inquiry as it may deem fit".

12. By virtue of sub-section (2) of Section 16 of SICA, in cases where the BIFR deems it necessary or expedient so to do for the expeditious disposal of an inquiry under Section 16(1), the BIFR may require an operating agency to inquire into and make a report with respect to such matters as may be specified in the orders passed by the BIFR in this regard. At this juncture we would like to point out that the definition of "operating agency" given in Section 3(1)(i) is as follows:

"(i) "operating agency" means any public financial institution, State level institution, scheduled bank or any other person as may be specified by general or special order as its agency by the Board;"

In other words, the operating agency has to be appointed by the BIFR by a general or a special order as its agent for the purposes of making a report. We may also mention that by virtue of Section 16(3), it is apparent that all endeavours are to be made to complete the inquiry as expeditiously as possible and within a period of sixty days from the commencement of the inquiry. The explanation to Section 16(3) makes it clear that an inquiry is deemed to commence upon the receipt by the Board of a reference or upon its own knowledge reduced to writing by the Board.

13. In the present case since a reference has been made by the Board of Directors of the petitioner company under Section 15(1), the inquiry would be deemed to have commenced on the date on which the reference was received, that is, on 12.07.2005. Consequently, if we were to strictly comply with the provisions of Section 16(3) of SICA, the BIFR should have endeavoured to complete the inquiry within sixty days thereof, but unfortunately that did not happen and even the first date on which the petitioners reference was taken up by the Board was much later, on 22.03.2006. Anyhow, that is another aspect of the matter with which we are not concerned in this writ petition.

14. It is clear from the above resume with regard to the provisions of Section 16 of SICA that it is incumbent upon the BIFR to conduct an inquiry for the purpose of determining whether the industrial company has become a sick industrial company or not. Such inquiry has to be conducted upon receipt of a reference under Section 15 or upon information received by the BIFR. The inquiry has to be conducted by the BIFR itself, but as provided under Section 16(2), where it is necessary for expeditious disposal of an inquiry and where the BIFR deems it expedient to do so, the BIFR may appoint an operating agency and require it to inquire into and make a report with respect to the matters which may be specified in the order. In any event, whether the inquiry is conducted by the Board itself or through an operating agency, it is imperative that once a reference is received, such an inquiry has to be conducted for determining whether the industrial company has become a sick industrial company or not. It is not open to the BIFR to reject a reference without returning a finding as to whether the company in question has become a sick industrial company or not.

15. What has been stated by us is also borne out in Chapter IV of the Board of Industrial and Financial Reconstruction Regulations, 1987 (hereinafter referred to as the "said regulations"). The said Chapter IV deals with inquiries under Section 16. Regulation 21 specifically provides that upon a reference with respect to an industrial company under Section 15 or upon information received with respect to such company or upon its own knowledge as to the financial condition of the company, the BIFR may either itself make such inquiry, as it may deem fit, for determining whether the company in question has become a sick industrial company or if it deems it necessary or expedient so to do, for the expeditious disposal of the said inquiry, direct by an order, an operating agency, to be specified in the order, to inquire into and make a report in respect of such matters as may be specified in the said order. By virtue of Regulation 22 the BIFR may also direct the operating agency to make a further inquiry if deemed necessary.

16. Regulation 24 is important. It reads as under:- "24. Where the Board after completion of its inquiry or after considering the report or, as the case may be, the further report of the operating agency, is satisfied that no case exists for coming to the conclusion that the industrial company has become a sick industrial company, it shall drop further proceedings in the reference."

It is clear that as per the said Regulation 24 also two situations are contemplated (1) completion of the inquiry by the Board itself or (2) after considering the report of the operating agency or further report of the operating agency, as the case may be. Regulation 24 makes it clear that upon either of the two eventualities, if the BIFR is satisfied that no case exists for coming to the conclusion that industrial company has become a sick industrial company, it shall drop further proceedings in the reference. This regulation also makes it clear that it is imperative for the BIFR to record its satisfaction with regard to the question as to whether the concerned company has become a sick industrial company or not. If the satisfaction recorded indicates that the company in question is not a sick industrial company then further proceedings in the reference are to be dropped. If, on the other hand, the BIFR comes to the conclusion and is satisfied that the company in question has become a sick industrial company, it would then, as mentioned above, have to determine as to whether the said company is one which has potential for revival and rehabilitation or one where revival is not a viable option. We have already pointed out the courses that would be followed in either eventuality.

17. The learned counsel for the respondents had referred to Regulation 40 in order to submit that it is open to the BIFR to take assistance of public financial institutions, banks, other institutions, consultants, experts, chartered accountants etc. in furtherance of its functions. They placed reliance on Regulation 40 for the proposition that the IA report submitted by M/s ANG and Associates would fall within such assistance as contemplated under this Regulation. Consequently, it was submitted that the Board committed no error in relying upon the IA report in so far as the petitioner company is concerned. Regulation 40 reads as under:

"Assistance to the Board. The Board may, at any time, take the assistance of public financial institutions, banks or other institutions, consultants, experts, chartered accountants, surveyors and such other technical and professional persons as it may consider necessary and ask them to submit report or furnish any information.

Provided that if the report or information so obtained or any part thereof is brought on record of any inquiry and is proposed to be relied upon by the Board for forming its opinion or view, the party or parties to the inquiry shall be given a reasonable opportunity of making his or their submissions with respect thereto."

One thing that immediately strikes us is that the assistance that is spoken of in Regulation 40 is invited at the instance of the BIFR. The language is clear, inasmuch as it contemplates that the BIFR may ask any of the said institutions, consultants, chartered accountants etc. to submit a report or furnish information. The occasion for the BIFR to do so would arise only after it commences an inquiry. As we have noticed above, the inquiry commenced, in this case, on 12.07.2005, the date on which the reference received by the BIFR. Therefore, the assistance that is contemplated in Regulation 40 is one which would be sought after the commencement of the inquiry by the BIFR and not some pre-existing report.

18. Having surveyed the various statutory provisions as well as the applicable regulations, we are of the clear view that the BIFR, once it receives a reference from the Board of Directors of the company, is duty bound to determine as to whether the company has become a sick industrial company or not. In the present case, we find that he BIFR did not return any such finding either way. All that the BIFR did was to reject the reference on the plea that the petitioner company had not approached the BIFR with clean hands, inasmuch as there were serious allegations in the IA report submitted by M/s ANG and Associates. The BIFR also rejected the reference on the ground that no reply to the IA report had been submitted by the petitioner company despite repeated opportunities. We are of the view that this approach is not in consonance with the law. Irrespective of the alleged conduct of the petitioner company, once a reference is received by the BIFR it has to make an inquiry for determining whether the company in question has become a sick industrial company or not. In the present case, we find that no such inquiry, as contemplated under Section 16 of the SICA, was embarked upon by the BIFR. On the contrary, BIFR, in fact, did not give any finding in so far as the IA report in respect of the petitioner company is concerned.

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