# U.P. STATE SUGAR CORPN. LTD v. U.P. STATE SUGAR CORPN. KARAMCHARI ASSO. AND ORS

- **Citation:** [1995] 3 S.C.R. 1004
- **Court:** Supreme Court of India
- **Decided:** 1995-05-02
- **Case number:** Civil Appeal No. 817 of 1995
- **Bench:** S.C. Agrawal, Sujata V. Manohar
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/u-p-state-sugar-corpn-ltd-v-u-p-state-sugar-corpn-karamchari-asso-and-ors-12991
- **Pages:** 33

## Headnote

Sick Industrial Companies (Special Provisions) Act, 1985-Sections 15,
22A and 23-Disposal of assets-Right of a Sick Industrial Company and a
potentially sick company when can be exercised.
,.l •
c
Sick Industrial Companies (Special Provisions) Act, 1985-Sections 15
and 23-fi.eference and report-Difference between.
Judiciary-Disparaging remarks against executive-Need for restraint.
D
The appellant is a company was incorporated with the object of
taking over and run certain private sugar mills which had been acquired
by the State of U.P. Sugar undertakiugs (Acquisition) Act, 1971. Certain
units thus acquired had been suffering from continuous losses. A decision
was taken to sell continuing loss making units. Eight such units were
E
marked for sale and an advertisement was published in newspapers on
20.3.1994 for outright sale of the said units.
The annual audited accounts of the appellant corporation for the
financial year 1989-90 ending on March 31, 1990 were adopted at the
annual general meeting held on 25.10.1993. The said accounts revealed that
F the net worth of the corporation bad been eroded by more than 50 per cent
which makes a company potentially sick industrial company and makes it
obligatory on the company to report such erosion to the Board of lndustrial
and Financial Reconstruction under Section 23(l)(a)(i) of the Sick In·
dustrial Companies (Special Provisions) Act, 1985. The fact of erosion of
G
the net worth was reported by the company to the Board of Industrial and
Financial Reconstruction vide its letter dated May 7/11, 1994 but the said
letter was described by the company as reference under the provisions of
the Act. Enclose with the letter dated May 7/11, 1994 was an application
•
in 'Form CC' which is a form prescribed for a report under Section 23 of
. r
Sick Industrial Companies (Special Provisions) Act, 1985 for a potentially
H sick industrial company. The letter dated May 7/11, 1994 was construed as
1004
•. . J..
SUGAR CORPN. v. SUGAR CORPN. KARAMCHARI ASSO.
1005
a report under Section 23 by the Board of Industrial and Financial A
Reconstruction.
The respondent filed a writ petition challenging the decision to sell
the sugar units and for quashing the advertisement for sale of the said
units on the ground that the appellant could not have alienated its assets
as it was a sick industrial company and proceedings were pending against B
it before the Board of Industrial and Financial Reconstruction. The appellant, in its counter affidavit, denied that the company was a sick industrial
company .
The High Court allowed the writ petition filed by the respondent. The C
High Court also directed the Registrar of the High Court to file complaint
against the deponent of the counter affidavit as well as the Secretary of the
appellant Corporation and the Board of Directors for violation of
provisions of Chapter XI of the !PC by making false and misleading
statements in the counter affidavit. The High court further disparagingly
referred to the attitude of the Civil servants in running the industrial D
undertakings in the pnblic sector.
\ .
f
'
Hence the present appeal.
Allowing the appeal, this Court
HELD: 1.1. The i:ick Industrial Companies (Special Provisions) Act,
1985 makes a distinction between the role assigned to the Board of In-
. dustrial and Financial Ikconstrnction in relation to a sick industrial
company, provisions for which are contained in Sections 15 to 22A in
E
'i
Chapter Ill, and in respect of a potentially sick industrial company for F
which provisions are contained in Sections 23, 23A and 23B in Chapter IV.
In respect of potentially sick industrial company the Board has been
assigned a more limited role of requiring such company to furnish periodic
information as to the steps taken by the company to make its net worth
exceed its accumulated losses. (1014-B-E]
1.2. Under the Sick Industrial Companies (Special provisions) Act
G
'
1985 the only restriction on the right of an industrial company to di

## Text

_Characters 0–39,914 of 77,514. This is a partial read: ask again with offset=39914 for what follows._

A
U.P. STATE SUGAR CORPN. LTD.
v.
U.P. STATE SUGAR CORPN. KARAMCHARI ASSO. AND ORS.
,._.
MAY 2, 1995
B
(S.C. AGRAWAL AND SUJATA V. MANOHAR, JJ.)
Sick Industrial Companies (Special Provisions) Act, 1985-Sections 15,
22A and 23-Disposal of assets-Right of a Sick Industrial Company and a
potentially sick company when can be exercised.
,.l •
c
Sick Industrial Companies (Special Provisions) Act, 1985-Sections 15
and 23-fi.eference and report-Difference between.
Judiciary-Disparaging remarks against executive-Need for restraint.
D
The appellant is a company was incorporated with the object of
taking over and run certain private sugar mills which had been acquired
by the State of U.P. Sugar undertakiugs (Acquisition) Act, 1971. Certain
units thus acquired had been suffering from continuous losses. A decision
was taken to sell continuing loss making units. Eight such units were
E
marked for sale and an advertisement was published in newspapers on
20.3.1994 for outright sale of the said units.
The annual audited accounts of the appellant corporation for the
financial year 1989-90 ending on March 31, 1990 were adopted at the
annual general meeting held on 25.10.1993. The said accounts revealed that
F the net worth of the corporation bad been eroded by more than 50 per cent
which makes a company potentially sick industrial company and makes it
obligatory on the company to report such erosion to the Board of lndustrial
and Financial Reconstruction under Section 23(l)(a)(i) of the Sick In·
dustrial Companies (Special Provisions) Act, 1985. The fact of erosion of
G
the net worth was reported by the company to the Board of Industrial and
Financial Reconstruction vide its letter dated May 7/11, 1994 but the said
letter was described by the company as reference under the provisions of
the Act. Enclose with the letter dated May 7/11, 1994 was an application
•
in 'Form CC' which is a form prescribed for a report under Section 23 of
. r
Sick Industrial Companies (Special Provisions) Act, 1985 for a potentially
H sick industrial company. The letter dated May 7/11, 1994 was construed as
1004
•. . J..
SUGAR CORPN. v. SUGAR CORPN. KARAMCHARI ASSO.
1005
a report under Section 23 by the Board of Industrial and Financial A
Reconstruction.
The respondent filed a writ petition challenging the decision to sell
the sugar units and for quashing the advertisement for sale of the said
units on the ground that the appellant could not have alienated its assets
as it was a sick industrial company and proceedings were pending against B
it before the Board of Industrial and Financial Reconstruction. The appellant, in its counter affidavit, denied that the company was a sick industrial
company .
The High Court allowed the writ petition filed by the respondent. The C
High Court also directed the Registrar of the High Court to file complaint
against the deponent of the counter affidavit as well as the Secretary of the
appellant Corporation and the Board of Directors for violation of
provisions of Chapter XI of the !PC by making false and misleading
statements in the counter affidavit. The High court further disparagingly
referred to the attitude of the Civil servants in running the industrial D
undertakings in the pnblic sector.
\ .
f
'
Hence the present appeal.
Allowing the appeal, this Court
HELD: 1.1. The i:ick Industrial Companies (Special Provisions) Act,
1985 makes a distinction between the role assigned to the Board of In-
. dustrial and Financial Ikconstrnction in relation to a sick industrial
company, provisions for which are contained in Sections 15 to 22A in
E
'i
Chapter Ill, and in respect of a potentially sick industrial company for F
which provisions are contained in Sections 23, 23A and 23B in Chapter IV.
In respect of potentially sick industrial company the Board has been
assigned a more limited role of requiring such company to furnish periodic
information as to the steps taken by the company to make its net worth
exceed its accumulated losses. (1014-B-E]
1.2. Under the Sick Industrial Companies (Special provisions) Act
G
'
1985 the only restriction on the right of an industrial company to dispose
"'-·
of its asset is that contained in Section 22A whereby the Board of Industrial and Financial Reconstruction has been empowered to pass an
order directing a sick industrial company not to dispose of, except with H
1006
SUPREME COURT REPORTS
[1995] 3 S.C.R.
A the consent of the Board, any of its assets. There is no provision similar
to Section 22A in chapter N of the Act whereby the Board may direct a
potentially sick industrial company not to dispose of its assets. Snch a
power conferred under Section 22A is restricted to a sick industrial
company only. (1025-E, 1014-G)
B
13. Except when the Board of Industrial and Financial Reconstrnction passes an express order in accordance with the provisions of Section
22A of the Sick Industrial Companies (Special provisions) Act, 1985, it is
not possible to infer a limitation from the provisions of the Act on the right
of a sick industrial company or a potentially sick industrial company to
C dispose of its assets. In so far as a potentially sick industrial company is
concerned, there appears to be no reason why such a company, in order
to revive itself, should not be able to dispose of its assets. (1028-A-B)
2.1. The letter dated May 7/11, 1994 and the annexed application in
D 'Form CC' which was sent by the appellant to the Board of Industrial and
Financial Reconstrnction clearly indicates that it is not a reference under
Section 15 of the Sick Industrial Companies (Special Provisions) Act, 1985
but it is a report under Section 23 of the Act because in the said letter it
is clearly mentioned that as per the annual accounts for the financial year
ended on March 31, 1990 net worth of the company has eroded by more
E than 50%. 'Form CC' in which the application was made has been
prescribed under Regulation 36 for a report under Section 23 of the Act.
Therefore, the letter dated May 7/11, 1994 sent by the appellant to the
Board was not a reference under Section 15(1) of the Act but it was a report
under Section 23 of the Act, and the High Court was not right in proceedF Ing on the basis that a reference had been made by the appellant under
Section 15(1) of the Act and the same was pending at the time of the
impugned sale. The provision in Section 22A cannot, therefore, be invoked
to impose a restriction on the power of the appellant to dispose of a part
of its assets after it had sent tloe letter dated May 7/11, 1994 by way of a
report under Section 23 of the Sick Industrial Companies (Special
G Provisions) Act. [1024-G, H, 1025-A-B)
2.2. The proviso to Section 15(1) of the Sick Industrial Companies
(Special Provisions) Act 1985 can have no bearing on the validity of the
impugned decision for sale. The making of a reference under Section 15
H does not ipso facto attract the restrictions on the right of a sick lndnstrial
..
•
_ _,
SUGAR CORPN. v. SUGAR CORPN. KARAMCHARI ASSO.
1007
company to dispose of its assets. Such a restriction has to be imposed by A
the Board of Industrial and Financial Reconstruction by a specific order
passed under Section 22A of the Act and such an order can be passed only
after the Board has considered the matter in accordance with the
provisions of Sections 16 and 17 of the Act and passed an order for
framing a scheme under Section 18 of the Act. [1026-H, 1027-A]
3.1. The statement in the counter affidavit that the corporation has
not been declared a sick industrial company cannot be held to be false or
misleading statement. The letter dated May 7/11, 1994 was not a reference
B
·-&
to the Board of Industrial and Financial Reconstruction under Section
15(1) of the Sick Industrial Companies (Special Provisions) Act. In the C
letter dated May 7/11, 1994 sent by the appellant it was stated that as per
I . ·,
the annual accounts for the financial year ended on March 31, 1990 the net
worth or the appellant corporation had eroded by more than 50 per cent,
meaning thereby that the corporation had become a potentially sick industrial company governed by Section 23 or the Act. [1030-F, C, BJ
D
3.2. It was never the case or the appellant corporation that erosion or
peak net worth being more than 50 per cent was considered at meeting held
on October 25, 1993. According to the Corporation the duly audited ac·
counts of the corporation for the year ending on March 31, 1990 had been
approved at the annual general meeting held on October 25, 1993. Section
23 postulates two general meetings, viz, (i) a meeting in which the audited · E
accounts of the company have been approved; and (ii) the meeting in which
the matter or erosion of 50 per cent or more or its peak net worth is
considered. The High Court was in error in assuming that no such meeting
dated October 25, 1993 was held. [1032-B, G-BJ
3.3. All that was indicated in reply in paragraph 47 of the counter F
affidavit of the appellant before the High Court was that there was no
impediment in the way of the appellant Corporation in selling the sugar
units under the provisions of the Sick I.ndustrial Companies (Special
Provisions) Act. The High Court has wrongly assumed that in the aver·
ments contained in paragraph 47 oftbe counter affidavit the appellant was G
· seeking to put the blame on the Board for delaying the proceedings.
[1034-EJ
3.4. No case is made out for prosecution of the person who had Sworn
the counter affidavit filed on behalf of the appellant in the writ petition
before the High Court or the company Secretary of the Appellant Corpora- H
1008
SUPREME COURT REPORTS
[1995] 3 S.C.R.
A tion or the Board of Directors. [1034-F)
4. Civil service has an important role in the administration of the
State. Civil servants are entrusted with the task of implementation of the
State Policies. They have been discharging their responsibilities to the best
of their judgment and abilities. On a number of occasions in the past,
B disapproval has been expressed for the use of strong and carping language
by judge while criticising the conduct of parties or their witnesses before
it. The Judges must act with sobriety, moderation and must have humility
to recognise that they are not infallible. In order to command respect there
must be respect by the judiciary to those who come before the court as well
C as other co-ordinate branches of the State, the executive and the legislature. [1036-D-F]
State of M.P. & Ors. v. Nandlal Jaiswal & Ors., [1986) 4 SCC 566 and
A.M. Malhur v. Pramod Kumar Gupta & Ors., [1990] 2 SCC 533, re:ied on.
D
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 817 of
1995.
From the Judgment and Order dated 9.12.94 of the Allahabad High
Court in C.M.W.P.No. 27998 of 1994.
E
Dushyant Dave, Ms. Niti Dikeshit and Pradeep Misra for the AppelF
lant.
Gobinda Mukhoty, Kapil Sibbal, Asbok Desai, S.K. Verma,
Chandrashekhar, Manoj Prasad, Manish Cboudhayr, R.B. Misra, Nalin
Tripathi for the Respondents.
Ms. Shashi Kiran and M.M. Kashyap for the Intervenor.
The Judgment of the Court was delivered by
S.C. AGRAWAL, J. This appeal, by special leave, is directed against
G the judgment of the Allahabad High Court dated December 9, 1994 in Civil
Miscellaneous Writ Petition No. 27998 of 1994 filed by respondents Nos.
1, 2 and 3 whereby it has been held that the U.P. State Sugar Corporation
.~
Ltd., appellant herein, (hereinafter referred to as 'the Corporation') was
not entitled to alienate its assets in view of the pendency of the proceedings
H before the Board of Industrial and Financial Reconstruction (hereinafter
SUGARCORPN.v. SUGARCORPN.KARAMCHARIASSO. [AGRAWAL,J.] 1009
referred to as 'the Board') under the provisions of the Sick Industrial A
'I'-
Companies (Special Provisions) Act, 1985 (hereinafter referred to as 'the
Act').
The Corporation is a company registered under the Companies Act,
1956. The State of U.P. holds 99.9% shares in the Corporation. The
Corporation was incorporated with the object of taking over and running B
the private sugar mills which had been acquired by the State of U .P. under
the U.P. Sugar Undertakings (Acquisition) Act, 1971. 29 such sugar mills
~Ji,
had been acquired and the Corporation has established 6 more units and
at present it is holding 35 sugar units spread over the State of U.P. The 29 c
sugar nuUs which had been acquired were old units and some of them were
established nearly forty years prior to their acquisition in 1971. Their plant
and machinery were obsolete and the units functioned at a very low
capacity. Their operations were highly unprofitable and consequently the
Corporation has been suffering continuing losses. In August 1992, the
Government of U .P. took a policy decision to privatise some of the units D
of the Corporation and a Privatisation Committee comprising senior offi-
'.
cials of the State Government after eliamining the matter came to the
!
conclusion that the sale -0f continuing losses making units was absolutely
necessary. The Board of Directors of the Corporation considered the
matter and on February 27, 1993 they resolved that 8 of the units at Meerut,
E
Bareilly, Barabanki, Burhwal, Nawabganj, Munderwa, Baitalpur and
Ghughli be initially privatised. The said proposal for sale of units was
accepted by the State Government and the said decision was communicated to the Corporation on September 4, 1993. The State Government
also formed a Committee to recommend the procedure to be followed for
-{,
such sale. The said Committee submitted its report on October 19, 1993 F
wherein the details of sale procedure to be followed was set out. This
report was again considered by the Privatisation Committee on December
31, 1993 which broadly accepted the same and it was decided to set up a
Committee to obtain proposals for privatisation, to negotiate with potential
buyers and take appropriate action. The said Committee decided to get G
appropriate evaluation of each of the units proposed to be sold from
independent valuers, namely, A.F. Ferguson & Company and S.R. Batliboi
' ..(.
& Company. Thereafter; on March 20, 1994 an advertisement was publish-
'•
ed in leading newspapers in the country inviting tenders for outright sale
of the said 8 sugar mills. In response to the said advertisement 41 qffers
were received but only 38 conformed to the requirements. The Committee H
1010
SUPREME COURT REPORTS
(1995] 3 S.C.R.
A presided over by the Principal Secretary, Sugar and Cane Department,
after considering the said offers, submitted its report to the Government
of U.P. on July 14, 1994. The said report was considered by the Privatisation Committee on July 19, 1994 and later by the State Government. Based
on the recommendations of the Privatisation Committee the State GovernB ment issued directions to the Corporation on July 27, 1994 which were
considered by the Board of Directors of the Corporation on July 28, 1994
and the said decision of the Board of Directors was approved at the annual
general meeting of the Corporation held on July 28, 1994. On August 24/25,
1994 the Writ Petition giving rise to the present appeal was filed in the
High Court by respondents Nos. 1, 2 and 3 (hereinafter referred to as 'the
C petitioners'). In the said writ petition the petitioners assailed the decision
for the sale of the 8 sugar mills and prayed for issuance of a writ, order
or direction in the nature of certiorari to quash the sale notice as published
in the newspapers dated March 25, 1994 and July 29, 1994 and all proceedings undertaken in pursuance thereof and also prayed for a writ, order or
D direction of a suitable nature restraining the Corporation as well as respondents Nos. 4 and 5 from taking any action on the basis of the impugned
sale notice. The said Writ Petition has been allowed by the High Court by
the impugned judgment.
At this stage it would be convenient to take note of the relevant
E provisions of the Act. As stated in the Preamble, the Act was enacted by
Parliament to make, in the public interest, special provisions with a view
to securing the timely detection of sick and potentially sick companies
owning industrial undertakings, the speedy determination by a Board of
experts of the preventive, ameliorative, remedial and other measures which
F
need to be taken with respect to such companies and the expeditious
enforcement of the measures so determined and for matters connected
therewith or incidental thereto. The Act was amended by Act No. 57 of
1991 and, more recently, by Act no. 12 of 1994 with effect from February
1, 1994. In the Act, as originally enacted, a Government company, as
defined in Section 617 of the Companies Act, was expressly excluded from
G the ambit of the Act inasmuch as the expression 'Company' under Section
3( d) of the Act was defined to mean "a company as defined in Section 3
of the Companies Act, 1956 (1 of 1956) but does not include a Government
company as defined in Section 617 of that Act." By Section 2 of Act No.
57of 1991 the words "but does not include a Government company as
H
defined in Section 617 of that Act" have been omitted from the said
)r
·~
1
\
SUGAR CORPN. v. SUGAR CORPN. KARAM CHARI ASSO. (AGRAWAL, J.] 1011
•'fprovision. As a result, a Government company has also been brought within A
the ambit of the Act. In Section 4 of the Act provision has been made for
the establishment of the Board.
Chapter III (Sections 15 to 22A) deals with references, inquiries and
schemes in respect of a sick industrial company. Section 15 provides that a
where an industrial company has become a sick industrial company a
reference shall be made to the Board for the determination of measures
-__,/
which shall be adopted with respect to the cr,mpany. Under sub-section (1)
of Section 15 such reference is required to be made by the Board of
Directors of the company within sixty days from the date of finalisation of
the duly audited accounts of the company for the financial year at the end c
of which the company has become a sick industrial company. Sub- section
(2) of Section 15 enables a reference to be made by 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. Section 16
empowers the Board to make such inquiry as it may deem fit for determin- D
'
ing whether an industrial company has become a sick industri.11 company
-,,,
upon receipt of a reference with respect to such 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. Section 17
prescribes that if after making an inquiry under Section 16 the Board, it is
E
satisfied that a company has become a sick industrial company, the Board
shall decide by an order in writing whether it is practicable for the company
to make its net worth exceed the accumulated losses within a reasonable
time and in that event the Board shall, by order in writing, give such time
"'-,(
to the company as it may deem fit to make its net worth exceed the
accumulated losses. If the Board decides that it is not practicable for a sick F
industrial company to make its net worth exceed the accumulated losses
within a reasonable time and that it is necessary or ei{pedient in the public
interest to adopt all or any of the measures specified in Section 18 in
relation to the said company it may, by order in writing, direct any operating agency specified in the order to prepare, having regard to such G
guidelines as may be specified in the order, a scheme providing for such
-c
measures in relation to such company. Section 18 makes provision for
preparation and sanction by the Board of a scheme with respect t~ a sick
industrial company providing for any one or more of the measures, namely,
financial reconstruction of the sick industrial company; the proper management of the sick industrial company by change in, or take over of, manage- H
1012
SUPREME COURT REPORTS
(1995] 3 S.C.R.
A ment of the sick industrial company; the amalgamation of the sick industrial
company with any other company or of any other company with the sick
industrial company; the sale or lease of a part or whole of any industrial
undertaking of the sick industrial company; the rationalisation of
managerial personnel, supervisory staff and workmen in accordance with
B law; such other preventive, ameliorative an remedial measures as may be
appropriate; and such incidental, consequential or supplemental measures
as may be necessary or expedient in connection with or for the purposes
of the measures referred to above. Section 19 makes provision for
rehabilitation by giving financial assistance if the scheme provides for
financial assistance by way of loans, advances or guarantees or reliefs or
C concessions or sacrifices from the Central Government, a State Government, any scheduled bank or other bank, a public financial institution or
State level institution or any institution or authority to the sick indnstrial
company. Section 20 provides that in cases where the Board, after making
an inquiry under Section 16 and after consideration of all the relevant facts
D and circumstances, is of all opinion that the sick industrial cqmpany is not
likely to become viable in future and that it is just and equitable that the
company should be wound up, it may record and forward its opinion to
the concerned High Court. Under Sub-section (4) of Section 20 the Board
is empowered to cause to be sold the assets of the sick industrial company
E in such manner as it may deem fit and forward the sale proceeds to the
High Court for orders for distribution in accordance with the provisions of
·section 529-A, and other provisions of the Companies Act, 1956. For the
proper discharge of its functions under the Act, Section 21 confers on the
Board the power with respect to matters specified in sub- sections (a) to
F
( d) relating to preparation of inventory of assets and liabilities and books
of account, list of shareholders, valuation report in respect of shares and
assets and an estimate of reserve price, lease rent or share exchange ratio.
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
G an appeal under Section 25 relating to an industrial company is pending,
by virtue of Section 22, notwithstanding anything contained in the Companies Act, 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
H industrial company or execution, distress or .the like against any of the
\
\
SUGAR CORPN. v. SUGAR CORPN. KARAMCHARIASSO. (AGRAWAL, J.] 1013
properties of the industrial company or for the appointment of a receiver A
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 Boar.d or, as the case may be, the Appellate Authority. Section 22A, B
which was introduced by Act 12 of 1994, provides that the Board may, if
it is of opinion that any direction is necessary in the interest of the sick
industrial company or creditors or shareholders or in the public interest,
by order in wriling direct the sick industrial company not to dispose of,
except with the consent of the Board, any of its assets (a) during the period
of preparation or consideration of the scheme under Section 18, and (b) C
during the period beginning with the recording of opinion by the Board for
winding up of the company under sub-section (1) of Section 20 and upto
commencement of the proceedings relating to the winding up before the
concerned High Court.
Chapter JV (Sections 23 to 36) contains provisions relating to D
proceedings in case of potentially sick industrial companies misfeasance
proceedings, appeals and other miscellaneous matters. Where the accumulated losses of an industrial company as at the end of any financial year
have resulted in erosion of fifty per cent or more of its peak net worth E
during the immediately preceding four financial years Section 23 requires
thai the company shall within a period of sixty days from the date of
finalisation of the duly audited accounts of the company for the relevant
fmancial year report the fact of such erosion to the Board and hold a
general meeting of the shareholders of the company for considering such
erosion. Section 23A, introduced by Act 12 of 1994, makes provision for F
reporting the fact of such erosion to the Board by 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 if it has sufficient reasons
to believe that the accummulated losses of any indusl:!'ial company have
resulted in erosion of fifty per cent' or more of its peak net worth during G
the immediately preceding four fmancial years and the further steps to be
taken by the Board on receiving information or upon its own knowledge
about such erosion of the peak net worth. Under Section 23B the Board
on receipt of a report under Section 23 or Section 23A or upon information
or its own knowledge may call for any periodic information from the H
1014
SUPREME COURT REPORTS
(1995] 3 S.C.R.
A company as to the steps taken by the company to make its net worth ercecd
the accumulated losses and the company shall furnish such information.
From a perusal of the aforesaid provisions of the Act it would appear
that the Act makes a distinction between the role assigned to the Board in
B relation to a sick industrial company, provisions for which are contained in
Sections 15 to 22A in Chapter Ill, and in respect of a potentially sick
industrial company for which provisions are contained in Sections 23, 23A
and 23B in Chapter IV. In respect of a sick industrial company the Board
has been assigned a more active role in the sense that on receipt of a
reference under Section 15 or upon information received with respect to
C such a company or upon its own knowledge about the condition of the
company, the Board is required to make such inquiry as it may deem fit
for determining whether an industrial company has become a sick industrial company and under Sections 16 and 17 the Board makes suitable
order after completion of the inquiry and a scheme may be prepared and
D
sanctioned in relation to a sick industrial company under Section 18. There
is provision for rehabilitation by way of financial assistance in Section 19
and express provision has been made in Section 22A empowering the
Board to direct a sick industrial company not to dispose of any of its assets
except with the consent of the Board during the period mentioned therein.
In respect of a potentially sick industrial company the Board has been
E
assigned a more ·limited role of requiring such a company to furnish
periodic information as to the steps taken by the company to make its net
worth exceed its accummulated losses. The Board can also require an
operating agency to inquire into and make a report with respect to the
matters specified in the order and on the basis of such report the Board
F may form its opinion that the company is not likely to become viable in
future and that it is just and equitable that it should be wound up. There
is no provision similar to Section 22A whereby the Board may direct a
potentially sick industrial company not to dispose its assets. Such a power
conferred under Section 22A is restricted to a sick industrial company only.
G
Having given a broad outline of the relevant provisions of the Act we
would refer to some of the provisions which require closer examination.
'
The expression "sick industrial company' is defined in Section 3(o) as
.r
under:-
H
"3( o) 'sick industrial company' means an industrial company (being
SUGAR CORPN. v. SUGAR CORPN. KARAM CHARI ASSO. [AGRAWAL, J.j 1015
a company registered for not less than five years) which has at the A
:y
end of any financial year accummulated losses equal to or exceeding its entire net worth.
Explanation.- For the removal of doubts, it is hereby declared that
an industrial company existing immediately before the commenceB
ment of the Sick Industrial Companies (Special Provisions)
Amendment Act, 1993, registered. for not less than five years and
having at the end of any financial year accummulated losses equal
•,--,I
to or exceeding its entire net worth, shall be deemed to be a sick
industrial company."
The expression "net worth" is defined in Section 3(ga) in the follow- c
ing terms:-
"3(ga) 'net worth' means the sum total of the paid-up capital and
free reserves.
D
Explanation.- For the purpose of this clause, 'free reserves' means
~
all reserves credited out of the profits and share premium account
but does not include reserves credited out of re-evaluation of
assets, write back of depreviation provisions and amalgamation."
The expression "date of finalisation of the duly audited accounts" is E
defined in Section 3( da) in the following terms :·
"( da) 'date of finalisation of the duly audited accounts' means the
date on which the audited accounts of the company are adopted.
""'"'
at the annual general meeting of the company."
F
Sections 15, 22A, 23, 23A and 23B provide as under:-
"Section 15. Reference to Board.-
( 1) Where an industrial company has become a sick industrial G
company, the Board of Directors of the company, shall, within sixty
··(.
days from the date of finalisation of the duly audited accounts of
the company for the financial year as at the end of which the
company has become a sick industrial company, make a reference
to the Board for determination of the measures which shall be
adopted with respect to the company :
H
1016
SUPREME COURT REPORTS
(1995) 3 S.C.R.
A
Provided that if the Board of Directors had sdfficient reasons
even before such finalisation to form the opinion that the company
,-(
had become a sick industrial company, the Board of Directors
shall, within sixty days after it has formed such opinion, make a
reference to the Board for the determination of the measures
B
which shall be adopted with respect to the company.
(2) Without prejudice to the provisions of sub-section (1), 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, if it has sufficient reasons to believe that any
c
industrial company has become, for the purposes of this Act, a
sick industrial company, make a reference in respect of such
company to the Board for determination of the measures which
may be adopted with respect to such company :
Provided that a reference shall not be made under this sub-secD
tion in respect of any industrial company by-
(a) the Government of any State unless all or any of the
I
\
industrial undertaking belonging to such company are
situated in such State;
E
(b) a public financial institution or a State level institution or
a scheduled bank unless it has, by reason of any financial
assistance or obligation rendered by it, or undertaken by it,
with respect to, such company, an interest is such Company."
F
"Section 22A. Direction not to dispose of assets.- The Board may,
,,-
if it is of opinion that any direction is necessary in the interest of
the sick industrial company or its creditors or shareholders or in
the public interest, by order in writing direct the sick industrial
company not to dispose of, except with the consent of the Board,
any of its assetsG
(a) during the period of preparation or consideration of the
scheme under Section 18; and
,,..
(b) during the period beginning with the recording of opinion
by the Board for winding up of the company under sub-secH
tion (1) of Section 20 and upto commencement of the
SUGARCORPN.v. SUGARCORPN.KARAMCHARJASSO. [AGRAWAL,J.] 1017
proceedings relating to the winding up before the concerned A
y
High Court."
"Section 23. Loss of fifty per cent net worth by industrial companies.-
(1) If the accumulated losses of an industrial company, as at the
end of any financial year (hereinafter referred to as the relevant B
financial year) have resulted in erosion of fifty per cent, or more
or of its peak net worth during the immediately preceding four
financial year,-
(a) the company shall, within a period of sixty days from the date c
(hereinafter referred to as the relevant date) of finalisation
of the duly audited accounts of the company for the relevant
financial year-
(i) report the fact of such erosion to the Board; and
(ii) hold a general meeting of the shareholders of the com- D
I,
. pany for considering such erosion;
•
, ,
(b) The Board of directors shall, at least twenty-one days before
tlie date on which the meeting under sub-clause (ii) of clause
(a) is held, forward to every member of the company a report E
as to such erosion and the causes for such erosion;
(c) The company may, be ordinary resolution passed at the
meeting held under clause (a) remove a director (being a
'"'-
director appointed by the members of the company) and fill
F
the vacancy created by such remova~ so far as may be, in
accordance with the procedure provided in sub-sections (2)
to (6) of Section 284 of the Companies Act, 1956 (1of1956).
(2) A director removed under sub-section (1) shall not be entitled
to any compensation or damages for determination of his appoint- G
ment as director or of any appointment terminating with that as
'i···
director.
(3) If default is made in complying with the provisions of this
sections, every director or other officer of the company who is in
default shall be punishable with imprisonment which shall not be H
1018
SUPREME COURT REPORTS
[1995) 3 S.C.R.
A
less than six months but which may extend to two years and with
fine."
B
c
D
E
F
G
H
"Section 23A. Proceedings on repon, Etc. of loss of fifty per cent net
wonh.-
(1) Without prejudice to the provisions of clause (a) of sub-section
(1) of Section 23, 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, if it has sufficient reasons
to believe that the accumulated losses or any industrial company
have resclted in erosion of fifty .per cent or more of its peak net
worth during the immediately preceding four financial years,
report the fact of such erosion to the Board.
(2) If the Board has, upon information received or upon its own
knowledge, reason to believe that the accumulated losses of any
industrial company have result in erosion of fifty percent or more
its peak net worth during the immediately preceding four financial
years, it may call such information from that company as it may
deem fit.
(3) Where the Board is of the opinion that an industrial company
referred to in sub-section ( 1) is likely to make its net worth exceed
its accumulated losses within a reasonable time while meeting all
its financial obligations and that the company as a result thereof
is not likely to become viable in future, it may require by order an
operating agency to inquire into and make a report with respect
to such matters as may be specified in the order.
( 4) After consideration of the report of the operating agency, tho
Board may publish or cause to be published a notice in such daily
newspapers as the Board may consider necessary, for suggestions
or objections, if any, within such period as the Board may specify,
as to why the company should not be wound up.
(5) Where the Board, after consideration of the relevant facts and
circumstances and after giving an opportunity of being heard to
all concerned parties, is of the opinion that the industrial company
is not likely to make its net worth exceed the accumulated losses
i
••
' ',..
SUGARCORPN. v. SUGAR CORPN. KARAMCHARIASSO.[AGRAWAL,J.[ 1019
with a reasonable time while meeting all its financial obligations A
,y
and that the company as a result thereof, is not likely to become
viable in future and that it is just and equitable that the company
should be wound up, the Board may record and forward its opinion
to the concerned High Court in relation to the company as if it
were a sick industrial company and the provisions of sub,sectio_ns B
(2), (3) and ( 4) of Section 20 shall apply accordingly."
"Sectio11 23B. Power of Board to call for periodic i11formatio11., On
receipt of a report under sub,clause (i) of clause (a) of sub,section
.,,_
(1) of Section 23 or under sub,section (1) of Section 23A or upon
information or its own knowledge under sub,section (2) of Section c
23A, the Board may call for any periodic information from the
company as to the steps taken by the company to make its net
worth exceed the accumulated losses and the company shall furnish
<
such information."
'
The annual audited accounts of the Corporation; for the financial D
year 1989-90, ending on March 31, 1990 were adopted at the annual general
meeting held on October 25, 1993. The said accounts showed that the total
I
accummulated losses of the Corporation on March 31, 1990 exceeded the
net worth, i.e., total paid up capital and free reserves of the Corporation
on March 31, 1990. On May 7/11, 1994 a letter was addressed by the E
Corporation to the Secretary of the Board which was as follows :-
"cs1sscn80
7-5-1994/11
•)<,
Sub:
Reference as prescribed under Sick Industrial (Special F
l
Provisions) Act, 1985.
Dear Sir,
Ours is a Government Company as per the provisions of Sec- G
tion 617 of the Companies Act, 1956 whole of share capital of
which l,tas been subscribed by the Government of U .P ..
'
--<,.
As per the Annual Accounts for the financial year ended on
31-3-1990 Net Worth of Company has been eroded by more than
50%. Under the amended Sick Industrial Companies (Special H
1020
A
B
c
D
SUPREME COURT REPORTS
[1995] 3 S.C.R.
Provisions) Act, 1985, the Company is required to make a reference to BIFR. Accordingly, as resolved by our Board of Directors
at their 148th Meeting held on 30th April, 1994 we submit herewith
our application in form CC alongwith required Annexures Etc.
We will be pleased to submit any further information as may
be required by BIFR.
Kindly acknowledge receipt of this application.
Thanking you,
Yours sincerely,
sdi-
(P.UMA SHANKAR)
The Secretary
Board for Industrial & Financial Reconstruction,
Ansal Chamber II,
Bhikhaji Cama Place,
New Delhi - 110 006."
E
Along with the said letter an application in 'Form CC', as prescribed
under Regulation 36, was also sent. In the said Form at serial No. 20 against
"Date. of finalisation of duly audited accounts of the company for the
relevant financial year (i.e. date of annual general meeting of the company)
thereat duly audited annual accounts of the company were approved for
the financial year at the end of which net worth declined to 50% or less of
F peak worth during the immediately preceding five financial year" it was
stated "25th October, 1993". At serial No. 21 against "Date on which the
general meeting of shareholders of the company is proposed to be convened for purpose of considering the erosion if not worth. Whether minimum 21 days notice given after the annual general meeting", it was stated
G "will be called shortly."
H
On May 27, 1994 the following communication was sent from the
office of the Board to the Corporation :-
"Government of India
Ministry of Finance
.-('
'
.~
SUGAR CORPN. v. SUGAR CORPN. KARAM CHARI ASSO. (AGRA WAL, J.J 1021
Economic Affairs
Board for Industrial and Financial Reconstruction
J avahar Vyapar Bhawan
Tolstoy Marg, New Delhi
A
BIFR/Sec.23/GC-32
Date 27.5.1994 B
To,
M/s. U.P. State Sugar Corpn.