| SooperKanoon Citation | sooperkanoon.com/48005 |
| Court | Company Law Board CLB |
| Decided On | Sep-20-2005 |
| Judge | K Balu |
| Reported in | (2006)132CompCas92 |
| Appellant | S.S. Organics Limited and V.N. |
| Respondent | B. Subba Reddy |
2. Shri R. Murari, learned Counsel appearing for the applicants, submitted: The Company is engaged since July, 1995 in manufacture of life saving drugs. However, on account of various factors beyond control of the applicants, herein, the Company became a sick industrial company in the year 1997 and was consequently, referred to BIFR. The petitioner though claims to be a promoter, never evinced any interest in the process of rehabilitating and reviving the Company.
Consequently, the second respondent, being the Managing Director formulated and submitted a rehabilitation proposal to the operative agency appointed by BIFR. The draft rehabilitation scheme was sanctioned on 12.02.2002 by BIFR. The scheme envisages conversion of rupees two hundred lakhs of unsecured loans brought in by the promoters viz. the applicants Nos. 2 to 6 alongwith their friends and relatives, into equity by issue and allotment of twenty lakhs equity shares of Rs. 10/- each at par in their favour. The sanctioned scheme further envisaged that Department of Company Affairs would exempt the applicability of Section 81 for the issue of equity shares on conversion of unsecured loans of promoters and friends and relatives to the tune of Rs. 200 lakhs, apart from exemption by SEBI and Stock Exchanges for issue of such equity shares but no such exemption was obtained under Section 81. In view of this, the Company issued a notice dated 27.01.2003 convening an extraordinary general meeting of the members on 27.02.2003 for the purpose of converting the unsecured loans received from the promoters, directors and their associates into equity shares and allotting 20,00,000 equity shares of Rs. 10/- each at par to those persons. The notice dated 27.01.2003 convening the extraordinary general meeting of the members of the Company for the purpose of allotment of impugned shares clearly indicates that the allotment proposed at the extraordinary general meeting was in terms of the sanctioned scheme by BIFR. Accordingly, the consent for conversion of the unsecured loans into equity shares as well as allotment of shares was accorded by the members of the Company, pursuant, to which, the Company issued and allotted, in furtherance of the scheme approved by BIFR, the impugned shares in favour of the promoters of the Company.
The grievance of the petitioner on account of the allotment of impugned shares to the respondents and non-allotment of 5,00,000 shares in his favour as envisaged in the notice of the extraordinary general meeting pursuant to the request made by K.Srinivas Reddy, an alternate director of the petitioner must be agitated before BIFR. In the meanwhile, the Company could not achieve the profitability and the earnings as envisaged in the scheme due to the drastic reduction in prices of the products manufactured by the Company, thereby it could not meet its payment obligations. Therefore, BIFR by its order dated 19.06.2003 came to the conclusion that the scheme had failed. BIFR formed a prima-facie opinion that it was just and equitable to wind up the Company. However, by an order dated 26.09.2003, BIFR kept in abeyance the winding up notice issued on 19.06.2003 and later on 27.01.2005 sanctioned a modified scheme. In the meanwhile, the applicants settled the outstanding amounts due to the State Bank of India separately under one time settlement scheme. The modified scheme stipulated conversion of further rupees two hundred and fifty lakhs of unsecured loans to be brought in during the financial years 2003-2004 and 2004-2005 by the promoters alongwith their friends and relatives into the equity by issue and allotment of twenty five lakhs equity shares of Rs. 10/- each at par. This is in addition to conversion of Rs. 200 Lakhs of unsecured loan as approved by the BIFR in February, 2002. Apart from further conversion of unsecured loans and allotment of 25 lakhs equity shares in favour of the promoters, a sum of Rs. 15 lakhs being unpaid interest to IDBI was converted into 1,50,000 equity shares of Rs. 10/-each.
These steps have been taken in accordance with the sanctioned scheme and revised sanctioned scheme respectively. After allotment of 250 lakhs shares of Rs. 10/- each in favour of the promoters of the Company, pursuant to the revised sanctioned scheme, the loan amount due to IDBI was cleared. However, the petitioner preferred an appeal before Appellate Authority for Industrial and Financial Reconstruction ("AAIFR") against the order of dated 27.01.2005 of BIFR sanctioning the modified scheme, by making specific reference to the terms of the scheme dated 12.02.2002 and challenging the allotment of 20,00,000 equity shares made in favour of the respondents and further contended that the conversion of unsecured loans of rupees two hundred and fifty lakhs into equity shares is invalid. The petitioner seeks to declare in the appeal that the scheme dated 12.02.2002 having failed, all actions taken in pursuance thereof should be deemed null and void and further for declaration that the terms of the sanctioned scheme dated 12.02.2002 had failed. The issue with regard to the twenty lakh shares is also the subject matter of the present company petition. The petitioner cannot agitate the very same issue before the CLB. Thus, the main issue raised in the company petition is substantively in issue in the appeal filed by the petitioner before AA1FR. The petitioner cannot be permitted to prosecute parallel proceedings on basis of the same allegations and for similar reliefs. Furthermore the petitioner filed a civil suit in O.S. No. 3167/2004 before the City Civil Court, Hyderabad, challenging the impugned allotment of shares. The Civil Court by its order dated 28.02.2005 held that the suit ought to be valued at rupees fifty lakhs for the purpose of court fee and that it has no pecuniary jurisdiction to trial the suit. Therefore, the petitioner cannot be allowed to maintain the present petition, which would result in a multiplicity of proceedings and in possible conflict of decisions. According to the petitioner, the respondents did not follow the orders of BTFR either in letter or in spirit.
By virtue of Section 26 of SICA, no civil court shall have jurisdiction in respect of any action taken or to be taken in pursuance of any power conferred by or under SICA, as re-enforced by the Madras High Court in Vasantha Mills Ltd. v. Industrial Reconstruction Bank of India 1995 (83) CC 216. The Supreme Court in Canara Bank v. Nuclear Power Corporation of India Limited (1995) 2 CLJ 203 held that Company Law Board in exercise of its function under Section 111 acts judiciously and that it is a permanent body constituted under a statute and hence, it is a Court, particularly, for the purposes of Section 9A of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992. Therefore, the CLB being a Court has no jurisdiction to adjudicate the allotment of 20,00,000 shares pursuant to the scheme sanctioned on 12.02.2002. Section 26 does not provide for bifurcation of the subject matter of an action as in the case of Section 8 of the Arbitration and Conciliation Act, 1996 and, therefore, the grievances in regard to the acts of mismanagement and statutory violations raised in the company petition cannot be separated and dealt with separately by this Board. In this connection, Shri Murari, learned Counsel relied on Sukanya Holdings Private Limited v. Jayesh H. Pandya , wherein, the Supreme Court held that "If bifurcation of the subject matter of a suit is contemplated, the legislature would have used appropriate language to permit such a course. Since there is no such indication in the language, it follows that bifurcation of the subject-matter of an action brought before a judicial authority is not allowed". This principle has been followed by this Board in Pinamaneni Subb Rao v. Semi Conductors Ltd. (2004) 53 SCL 58 and Altek Lammertz Needles Limited v. Lammertz Industrienadel GMBH in CP No. 3/2004 - order dated 31.03.2004. Therefore, the petition in the present form cannot be maintained, unless and until the petitioner seeks to amend the company petition deleting his allegations and prayer in relation to the allotment of impugned shares.
3. Shri P.H. Arvindh Pandian, learned Counsel, while opposing the application on the maintainability of the company petition submitted: While the petitioner is a promoter, his brother-in-law, being the second respondent was his alternate director, but not a promoter of the Company. The second respondent became, with effect from January 1997, an employee Managing Director and was a power of attorney holder of the petitioner till the year 2004. The scheme sanctioned on 12.02.2002 envisages among, other things, conversion of Rs. 200 lakhs out of the outstanding unsecured loans of the promoters, friends and relatives into equity share capital of the Company at face value of Rs. 10/- each. BIFR directed the Company to make available the details of unsecured creditors, but were never furnished by the Company. BIFR by an order dated 26.09.2003 ordered that the winding up notice issued on 19.06.2003 may be kept in abeyance for the present. The respondent is challenging the allotment of 20,00,000 shares to the second respondent and his associates, who are not promoters of the Company. The petitioner being a promoter ought to have been allotted shares towards his unsecured loans lying in the Company, in accordance with the explanatory statement appended in the notice dated 27.01.2003 convening the extraordinary general meeting. The Company failed to follow the order of BIFR either in letter or in spirit. The Company did not allot 20,00,000 shares under BIFR order, but rather allotted the shares under Section 81(1A) and therefore, this Bench has jurisdiction to adjudicate the contentious issue in regard to the impugned allotment. The Company invoked Section 81(1A) and called for an extraordinary general meeting on 27.02.2003. The notice and the explanatory statement appended to the extraordinary general meeting are in variance from the stipulations of the sanctioned scheme dated 12.02.2002. Thus, the allotment made pursuant to Section 81(1A) in favour of the second respondent, his family members and associates, but not in terms of the sanctioned scheme can be agitated before this Bench and while so, the promoters, friends and relatives were not allotted shares, in spite of the huge unsecured loans extended by them have been lying with the Company, since the year 1995. The second respondent, his family members and associates did not have any substantial amounts by way of unsecured loans either as on the cut off date, viz., 31.03.2001 or on the date of the order dated 12.02.2002 of B1FR, but shares were allotted in their favour in gross violation of BIFR order. " When the sanctioned scheme was under review from 26.12.2002 and when the Company failed to submit a draft modified scheme by 31.01.2003 and ultimately when the sanctioned scheme of February 2002 was declared as failed as on 19.06.2003, the impugned allotments were made on 25.04.2003 and, therefore, cannot take protection under the sanctioned scheme. The notice dated 27.01.2003 convening the extraordinary general meeting was issued under the guise of BIFR order. The order of BIFR dated 26.09.2003 clearly indicates that the Company failed to comply in full with the terms and conditions of the scheme approved in February 2002.
At the same time, the Company had caused the notice dated 27.01.2003, convening the extraordinary general meeting, which would imply that the notice was issued independent of the approved scheme, but under Section 81(1A) of the Act. The said notice specifically mentions that SEBI Guidelines for preferential offer are not applicable. However, as a good corporate governance, it is reported that the details are given in the notice in the interest of the shareholders. This amounts to mis-representation. The allotment made pursuant to the notice dated 27.01.2003 was not in accordance with the scheme sanctioned on 12.02.2002. The Company furnished belatedly a list of allottees and filed the return of allotment with the Registrar of Companies only on 30.04.2003, after the scheme was declared as failed. The petitioner never appointed K.Srinivas Reddy as his alternate director and the letter dated 25.04.2003 given by Srinivas Reddy disclaiming the allotment of shares to the tune of Rs. 5 lakhs in terms of the notice of extraordinary general meeting is a fabricated document, especially when the said letter is addressed only to the second respondent and not to the board of directors. The outstanding dues of State Bank of India were not settled under the scheme sanctioned on 12.02.2002, but independently discharged the dues under one time settlement scheme by the respondents, as could be seen from the minutes of the proceedings dated. 27.12.2002 of BIFR. The IDBI dues were settled pursuant to the modified sanctioned scheme dated 27.01.2005. The order dated 27.01.2005 sanctioning the revised approved scheme categorically shows that the respondents failed to implement the scheme sanctioned on 12.02.2002, especially when none of the promoters got any shares at the time of allotment made in April, 2003, but at the same time, the second respondent and his associates not being promoters were allotted the impugned shares, which must be set aside. The modified sanctioned scheme envisages, inter-alia, one time settlement of a part of the principal amount due to IDB1 and repayment of balance principal amount and payment of the interest amount in a number of instalments as specified therein and further conversion of Rs. 15,00,000/- towards recovery of part of the interest into 1,50,000 equity shares of Rs. 10/- each in favour of IDBI. The revised modified scheme further envisages exemption by SEBI and Stock Exchanges in favour of the Company, its promoters, friends and associates for issue of equity shares, conversion of unsecured loan of Rs. 250 lakhs and issue of 1,50,000 equity shares to IDBI, from the provisions of the Securities (Contract and Regulation) Act, SEBI Act and Rules and Guidelines of SEBI. The cut-off date for the rehabilitation scheme under the modified revised scheme was 31.03.2003. The Company and its promoters would bring in unsecured loan of Rs. 250 lakhs, but not Rs. 200 lakhs sanctioned under the scheme sanctioned on 12.02.2002. Thus, only unsecured loans to the tune of Rs. 250 lakhs must be converted into equity shares of Rs. 10/- each. BIFR has not granted any exemption under Section 81(1A) of the Act and, therefore, the Company was bound to comply with the requirements of Section 81(1A), while allotting Rs. 250 lakhs pursuant to the modified approved scheme. While the petitioner is challenging the impugned allotment before the CLB, the allotment of 250,00,000 shares made under the modified revised scheme is challenged before AAIFR. The balance sheet for the year ended 31.03.2001 discloses unsecured loans only to the tune of Rs. 352 lakhs and the balance sheet for the year ended 30.09.2003 shows unsecured loan to the tune of Rs. 222 lakhs. Thus, when the impugned allotment for Rs. 200 lakhs was made on 25.04.2003 and the allotment of Rs. 250 lakhs made under the modified approved scheme on 28.03.2005, there were no adequate unsecured loans available with the Company. Consequently, the unsecured loans to the tune of Rs. 450 lakhs could not have been converted into the equity shares. The petitioner has filed an appeal before AAIFR against the order of BIFR dated 27.01.2005 sanctioning the modified sanctioned scheme and questioning the allotment of 25,00,000 shares made on 28.03.2005. The appeal is for the limited purpose of modification of certain clauses in the revised modified scheme sanctioned on 27.01.2005, which are detrimental to the interests of the petitioner. The petitioner is challenging before AAIFR the conversion of unsecured loans but not the allotment of 200 lakhs shares in favor of the second respondent and his relatives. The petitioner filed a civil suit challenging the impugned allotments, but he is not aware of its dismissal on pecuniary jurisdiction before filing of the company petition. By virtue of Section 26 of SICA no civil court shall have jurisdiction in respect of any matter, which AAIFR or BIFR is empowered to determine under SICA. The Allahabad High court in Prakash Timbers Private Limited v. Sushma Shingla (1997) 89 CC 770 held that the CLB is only a tribunal and not a court. The High Court of Andhra Pradesh in RDF Power Projects Limited v. M. Muralikrishna (2005) 59 SCL 311 held that the CLB has some of trappings of a Court, but, given the scope, functions, the special jurisdiction conferred upon it and control of Central Government over it, it cannot be regarded as a Court.
Therefore, proceedings before the CLB, though judicial in nature, they being only for limited purpose, cannot be treated as a suit within generic meaning of the term "suit". Thus, the CLB is not the civil court within the meaning of Section 26 of SICA and, therefore, Section 26 cannot be invoked. Consequently, the grievances in regard to the allotment of imougned shares can be raised before the CLB. The company petition consists of two parts, viz., the allotment of impugned shares and several allegations of mismanagement under Section 398. The inspection of books of account and other records of the Company carried out by the Central Government brought out several instances of gross violation of the provisions of the Act, including violation of the terms of the order of BIFR. These acts of oppression and mismanagement must be adjudicated by this Bench. The cause of action cannot be bifurcated and, therefore, the company petition is maintainable. The decision in Sukanya Holdings (P) Ltd., cited by Shri Murari, having arisen in relation to the provisions of Section 8 of Arbitration and Conciliation Act, has no application to the facts of the present company petition. The other decisions, viz. Pinamaneni Subb Rao v. Semi Conductors Ltd. and Altek Lammertz Needles Limited v. Lammertz Industrienadel GmbH (supra) cannot go to the aid of the respondents.
Section 34(2)(iv) of the Arbitration and Conciliation Act provides for bifurcation of the issues, which, however, cannot be applied to the CLB proceedings. The CLB in Prinyanka Overseas Pvt. Ltd. v. Pasupathi Fabrics Ltd. order dated 25.08.2005 in CP No. 38/2005 held that there is no provision either in SICA or in the rules or in the scheme anything inconsistent with the provisions of Sections 397 and 398 to contend that once a company is registered with BIFR, shareholders cannot initiate proceedings under Sections 397 & 398. The Supreme Court in Deputy Commercial Tax Officer v. Corromandal Pharmaceuticals (1997) 89 CC1, while considering the protection envisaged in Section 22 of SICA came to the conclusion that the bar or embargo contained in Section 22(1) of SICA can apply only to such of those dues reckoned or included in the sanctioned scheme. Any other amounts not included in the scheme cannot be covered under Section 22. Section 26 of SICA is not a legal bar and, therefore, the CLB proceedings can be continued for bringing to an end the acts of oppression and mismanagement alleged in the company petition. Though the Registrar of Companies issued a show-cause notice dated 24.06.2005 pointing out the various irregularities in the affairs of the Company, including the violation of the orders of BIFR, the Company did not choose to file the reply given to Registrar of Companies. This Bench may call for the inspection report from the Central Government more so, when the Central Government cannot claim any privilege in respect of the inspection report, as held by the CLB in Central Government v. Premier Automobiles Ltd. (2005) 59 SCL 654, while prosecuting the application for appointment of government directors on the strength of the findings in the inspection report. In these circumstances, the petitioner is empowered to prosecute the company petition before the CLB.4. Shri Murari, learned Counsel in his rejoinder submitted: The rehabilitation scheme sanctioned on 12.02.2002 and the modified sanctioned scheme do not stipulate any specific date of conversion of the unsecured loans of the promoters into equity shares. BIFR, while sanctioning the rehabilitation scheme on 12.02.2002 stipulated conversion of Rs. 200 lakhs out of the outstanding unsecured loans into equity shares of the Company, without specifying the dates thereof. The purpose of cut-off date as specified in the scheme is only for the purpose of; freezing the liabilities due to the banks and financial institutions and not for conversion of unsecured loans of the promoters into equity shares in terms of the rehabilitation scheme sanctioned by BIFR. The impugned allotment was made on 25.04.2003, whereas the scheme was declared failed only on 19.06.2003. By virtue of Section 32 of SICA, BIFR exempted the modified sanctioned scheme from the provisions of the Companies Act, 1956 and, therefore, there is no need for the Company to comply with the provisions of Section 81(1A) of the Act and further there was no requirement of any resolution under Section 81(1A) for the modified sanctioned scheme. The modified sanctioned scheme stipulates that SEBI and Stock Exchanges will exempt the Company, its promoters, friends and associates for the issue of equity shares on conversion of unsecured loans of Rs. 250 lakhs and issue of 1,50,000 equity shares in favour of IDBI from the procedural provisions of Securities (Contract and Regulation) Act, SEBI Act and Rules and Guidelines of SEBI. BIFR exempted the applicability of the provisions contained in any other law except the provisions of the Foreign Exchange Regulation Act, 1973 and the Urban Land (Ceiling and Regulations) Act, 1976. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 do not apply to the allotment made in pursuance of the scheme framed under the SICA as envisaged in Regulation 3(1)(j)(i). Similarly SEBI (Disclosure and Investor Protection) Guidelines, 2000 do not apply in the case of allotment of shares to a person/group of persons in accordance with the provisions of rehabilitation package approved by BIFR in terms of Clause 13.7.1 of the guidelines. SEBI never prosecuted the applicants for allotting the impugned shares, but on the other hand listed those shares on the stock exchanges. The assumptions of financial projections forming part of the modified sanctioned scheme on 27.01.2005 clearly disclose that the promoters should infuse Rs. 250 lakhs during the financial year 2003-2004 and 2004-2005 in addition to conversion of Rs. 200 lakhs of unsecured loans as per the earlier package approved by BIFR in 2002.
The analysis of balance sheet and the projected balance sheet contained in Annexure-I and Annexure-II forming part of the modified sanctioned scheme clearly indicate the share capital of the Company as envisaged in the modified sanctioned scheme. Accordingly, the share capital for the year ended 31.03.1998 and for the subsequent period ended upto 31.03.2002 is shown at Rs. 555 lakhs while the share capital for the year ended 31.03.2004 at Rs. 920 lakhs and for the year ended 31.03.2005 is shown as Rs. 1,020 lakhs. The audited balance sheet as at 30.09.2003 shows the paid-up capital of Rs. 755 lakhs. The auditors' report dated 13.02.2004 forming part of the annual report for the year ended 30.09.2003 shows that the Company during the period ended 30.09.2003 allotted 20,00,000 equity shares of Rs. 10/- each at par, as per the terms and conditions of the rehabilitation scheme approved by BIFR. The dues of State Bank of India have been settled under one time settlement scheme approved by the Bank, which is within the knowledge of BIFR as borne out by the minutes dated 27.12.2002 of the proceedings of BIFR. The decisions cited by Shri Arvindh Pandian are inapplicable to the facts of the present case. The provisions of Section 34(2)(a)(iv) of the Arbitration and Conciliation Act provides for bifurcation of the subject matter, whereas Section 26 of SICA does not envisage bifurcation of the subject matter and therefore the company petition in the present form is not maintainable. Unless the company petition is amended, deleting the averments relating to the impugned allotment, the same cannot be prosecuted before the CLB.5. I have considered the elaborate arguments of learned Counsel. The issues which arise for my consideration are - 1) Whether the Company Law Board has jurisdiction to set aside the allotment of 20 lakhs shares of the Company impugned in the company petition? 2) If not so, whether bifurcation of the subject matter of the company petition is permissible? In other words, whether the acts of mismanagement and various other statutory violations complained of can be separated from the purported illegal allotment of shares so as to exercise jurisdiction by the CLB, with a view to bringing to an end such grievances? While the petitioner complains that under the guise of the sanctioned scheme dated 12.02.2002, the second respondent, not being a promoter got allotted 20 lakhs shares to himself and his associates on the pretext that they had inducted loans to the tune of Rs. 200 lakhs, without actual infusion of funds and in exclusion of the petitioner, despite the fact that the unsecured loans were also brought in by him, it is contended by the respondents that the petitioner now claiming to be a promoter, at the relevant point of time, disassociated himself from the Company and was not interested in either infusing funds or in further acquiring shares in the Company. In this context, the scheme sanctioned by BIFR on 12.02.2002 assumes relevance, essentials of which are as under: o Payment of instalments to IDBI and State Bank of India as per the schedule.
o To give personal guarantee of the petitioner and the second respondent.
o To bring in further unsecured loans of Rs. 60 lakhs by the promoters.
o To convert Rs. 200 lakhs out of the outstanding unsecured loans of promoters, friends and relatives into equity capital of the Company.
o To grant exemption by Department of Company Affairs from the applicability of Section 81 of the Companies Act, 1956 for the issue of equity shares on conversion of unsecured loans.
o To grant exemption by SEBI and Stock Exchanges to the Company, promoters, friends and relatives for the issue of equity shares on conversion of unsecured loans of those persons of Rs. 200 lakhs from the provisions of Securities Contract Act, listing agreement, SEBI Act, the rules and guidelines of SEBI. o To maintain the existing shareholding pattern save to the extent provided in the scheme.
It is on record that BIFR formed an opinion on 27.12.2002 that the Company had not fully complied with the terms of the sanctioned scheme and gave yet another opportunity to the Company for submitting a revised Draft Rehabilitation Scheme by 31.01.2003. When no revised scheme was submitted before the stipulated date, BIFR declared on 19.06.2003 that the sanctioned scheme dated 12.02.2002 failed. Thus, when the sanctioned scheme was under review since December, 2002 and ultimately declared as failed, the Company convened an extraordinary general meeting of the members of the Company on 27.02.2003, wherein a special resolution was passed under Section 81(1A) to convert the unsecured loans to the tune of Rs. 200 lakhs, upon which, the impugned shares for Rs. 200 lakhs were allotted to the second respondent group.
According to the petitioner, as claimed in the company petition, the special resolution and the consequent allotment of shares are illegal and unauthorized by BIFR, which deserve to be set aside by the CLB, for the following reasons: o When the extraordinary general meeting was held on 27.02.2003 and the impugned allotment of shares was made on 25.04.2003, neither the first sanctioned scheme dated 12.02.2002, nor the modified scheme sanctioned on 27.01.2005 was in force.
o The Company, being a listed company, did not comply with the requirements of - (a) SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997; and (b) SEBI (Disclosure and Investor Protection) Guidelines, 2000 in the matter of issue and allotment of equity shares.
o The explanatory statement for the increase in authorized capital discloses that the increase is for converting the unsecured loans of directors only, when the explanatory statement for the special resolution under Section 81(1A) speaks about the "allotment of shares to promoters, directors and their associates. The latter statement in the explanatory statement is not in accordance with the stipulation of BIFR. o The explanatory statement discloses that the allotment of 20 lakhs shares would not result in any change in control of the Company, but the impugned allotment resulted in change in the shareholding pattern and control of the Company in gross violation of the sanctioned scheme dated 12.02.2002.
o The explanatory statement indicates that 5 lakhs shares would be allotted to the petitioner and his associates and 15 lakhs shares would be allotted to the second respondent and his associates.
However, the second respondent got the entire 20 lakhs shares allotted to himself, family members and associates without allotting any shares in favour of the petitioner, in spite of the availability of unsecured loans in excess of Rs. 26 lakhs to his credit with the Company.
o The sanctioned scheme permitted the second respondent for conversion of "outstanding unsecured loans of promoters, friends and relatives", but the second respondent by invoking Section 81(1A) allotted the shares in his favour, his family members and associates in gross violation of the terms of sanctioned scheme dated 12.02.2002. In the explanatory statement the term "outstanding" was deliberately omitted and further the words "Directors and their Associates" were added for the words "friends and relatives".
Therefore, the allotments were done only under Section 81(1A) of the Act. However, the promoters, their friends and relatives were not allotted any shares, though huge unsecured loans given by them were lying with the Company since the year 1995.
o The third respondent was never appointed as an alternative director to the petitioner. The letter dated 25.04.2003 of the third respondent addressed to the second respondent stating that the petitioner "does not want to convert his unsecured loan into equity and would like to get his money back" giving up 5 lakhs shares is a fabricated document.
o There were 290 unsecured loanees at the time of the sanctioned scheme dated 12.02.2002, while only 37 loanees were allotted shares.
However, the particulars of unsecured loans given by any members to the Company are not reflected in the explanatory statement.
o By virtue of the impugned allotment of shares, while the holding of the petitioner is reduced from 24.67% to 18.5%, the holding of the second respondent increased from 0.54% to 30% of the paid-up capital of the Company. Thus, the impugned allotment was made with the sole intention of increasing the second respondent's control over the Company. The petitioner, being a promoter ought to have been allotted shares towards his unsecured loans lying in the Company in terms of the notice dated 27.01.2003, convening the extraordinary general meeting.
The petitioner has filed an appeal, prior to filing of the company petition, before AAIFR against the order dated 27.01.2005 of BTFR sanctioning the modified scheme, wherein, the issues, inter-alia, relating to the impugned allotment of shares are raised as under:- o The petitioner is aggrieved by the modified sanctioned scheme by BIFR directing the promoters to bring in further unsecured loans of Rs. 250 lakhs and convert the promoters' unsecured loans to the extent of Rs. 250 lakhs into equity, which shall result in further dilution of the shareholding of the petitioner and the change in the equity structure of the Company.
o The promoters were required to convert Rs. 200 lakhs of unsecured loans into the equity share capital of the company in terms of the scheme sanctioned by BIFR on 12.02.02. BTFR did not envision the change in the equity structure of the company. However, under the garb of the sanctioned scheme, the second respondent got allotted almost all the shares (20 Lakh shares) to his family and friends and associates on 25.4.2003 by representing that they have infused loans to the extent of Rs. 200 lacs, without actual infusion of funds.
With this improper, illegal and unethical act, he acquired direct/indirect control over the company to nearly 27% whereas the shareholding of the petitioner got reduced from 23.78% to 18.14%.
o The impugned allotments were made through books entries to those persons who had not given unsecured loans and if an enquiry is conducted, it will be known that no funds have been brought in by the allottees by taking the shield of BIFR's order dated 12.02.02.
Moreover, the Company being under the effective control of the second respondent did not allot any shares to the petitioner, despite the fact that the unsecured loans were also brought in by the petitioner.
o The shareholding structure pursuant to the impugned allotment is changed to the detriment of the petitioner who is the original promoter of the Company. When the sanctioned scheme dated 12.2.2002 had been declared as failed on 19.06.2003, the terms of the said scheme including the allotment of impugned shares in favour of the family, friends and associates of the second respondent had become infructuous.
o While sanctioning the modified scheme BIFR ignored the fact that the sanctioned scheme dated 12.02.2002 has been declared as failed on 19.06.2003. However, BIFR did not set right the anomalies of the earlier sanctioned scheme, but recognized the terms of the failed scheme. All actions purportedly taken in pursuance of the previously failed scheme were to be termed as null and void including the allotment of 20 lakhs shares, but instead, directed the promoters to bring in further unsecured loans of Rs. 250 lacs.
o The second respondent falsely representing himself as the nominee of the petitioner, without his knowledge and concurrence made a petition to BIFR keeping him in dark about the real proceedings and developments at BIFR. Being an NRI the petitioner was not aware about the real situation, deliberation, affidavits, statements filed by the Company before BIFR. o The petitioner is seeking for declaration that the earlier sanctioned scheme dated 12.02.2002 failed.
The grounds of appeal reveal that the controversies with regard to 20 lakhs shares are found to be raised both before AAIFR and CLB. The petitioner, herein seeks before AAIFR to conduct an enquiry to unveil whether the allotment of 20 lakhs shares was made through book entries, without infusion of additional funds by the second respondent and his associates. The grievance of the petitioner that the allotment of 20 lakhs shares in favour of the second respondent group resulting in change in the shareholding pattern and control of the Company is in violation of BIFR order dated 12.02.2002. Any allegation relating to non-compliance with the scheme has to be agitated before BIFR in terms of the provisions of SICA, as categorically held by this Board in Priyanka Overseas Private Limited v. Pasupati Fabrics Limited (supra).
Taking into consideration the grounds of appeal in totality, AAIFR is expected to give its finding on the issues whether the allotment of 20 lakhs of shares in favour of the second respondent group was made through book entries, without infusion of any funds by the second respondent and his associates and whether the said allotment is "improper, illegal and unethical act". These are the acts of oppression pleaded before the CLB against the respondents. The remedy, if the petitioner establishes his case before AAIFR as well as CLB, would be the same, but under the different statutory provisions. The petitioner seeks the intervention of AAIFR for declaration that the earlier sanctioned scheme failed. As a result of such declaration, all actions taken pursuant to the scheme sanctioned on 12.02.2002 would become null and void, including the allotment of 20 lakhs shares made on 25.04.2003 in favour of the respondent group, which is one of the main prayers in the company petition. Therefore, the plea of the petitioner that he is challenging before AAIFR only the conversion of unsecured loans and not the impugned allotment of shares does not survive. The assertion of the petitioner that the impugned allotment of shares was made invoking Section 81(1A) on the premises that the explanatory statement for the increase in the authorized capital, conversion of the unsecured loans into equity share capital of the Company in favour of the directors and their associates are not in consonance with the stipulations of BIFR, is in no way justified in the light of the statutory duty cast upon the Company, in the absence of any exemption granted by Department of Company Affairs from the applicability of Section 81 of the Act for the issue of equity shares on conversion of the secured loans, to comply with the provisions of Section 81(1A). The Bench has no jurisdiction to adjudicate this disputed issue, i.e., conversion of unsecured loans into equity share capital of the Company and consequent allotment of shares to the respondent group, in exclusion of the petitioner, in violation of BIFR order dated 12.02.2002, especially when it is within the sole authority of BIFR/AAIFR. The petitioner admittedly instituted a civil suit in O.S. No. 3167/2004 before the City Civil Court at Hyderabad prior to the filing of the company petition for declaration of the impugned allotment of shares as null and void, inoperative, which was not, however, entertained by the court for want of pecuniary jurisdiction. The petitioner cannot seek to prosecute parallel proceedings on basis of the same allegations and for similar reliefs.
Similarly, the respondents are free to press their claim before AAIFR that the modified scheme sanctioned on 27.01.2005, recognized the impugned allotment of 20 lakhs shares, made pursuant to the originally sanctioned scheme dated 12.02.2002 as borne out by the financial projections forming part of the sanctioned modified scheme dated 27.01.2005 and further that the modified scheme provided for, apart from the disputed conversion of Rs. 200 lakhs of unsecured loans, the conversion of a further sum of Rs. 250 lakhs of unsecured loans into equity. Therefore, the petitioner cannot challenge the impugned allotment before the CLB, but only before AAIFR. In view of the foregoing conclusions, this issue is answered in the negative.
While according to Shri R. Murari, learned Counsel, Section 26 of SICA does not provide for bifurcation of the subject matter and, therefore, the grievances of the petitioner in regard to the acts of mismanagement and statutory violations cannot be separately dealt by this Board, it is vehemently contended by Shri Arvind Pandian, learned Counsel that the bar of jurisdiction, as contemplated in Section 26, is not applicable to the CLB. Thus, Section 26 of SICA assumes relevance to determine this contentious issue. Section 26 reads as under:- Bar of jurisdiction. - No order passed or proposal made under this Act shall be appealable except as provided therein and no civil court shall have jurisdiction in respect of any matter which the Appellate Authority or the Board is empowered by, or under, this Act to determine and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act.
A perusal of Section 26 reveals that no order of BIFR or AAIFR or proposal made under SICA would be appealable in civil courts. No civil court shall have jurisdiction in respect of any matter which AAIFR or BIFR is empowered under SICA to determine. Nor injunction is possible to be granted by any court or authority in respect of any action taken or to be taken, pursuant to the powers conferred under SICA. Thus, the jurisdiction of civil courts has been excluded by Section 26 of SICA in respect of any matter enjoined upon BIFR or AAIFR under SICA. According to Shri Aravind Pandian, learned Counsel, the CLB is not a civil court, as borne out the various judgments cited supra and, therefore, the bar of jurisdiction as contemplated in Section 26 is inapplicable to the CLB. In this connection, this Board, while recently interpreting the provisions of Section 26 in Priyanka Overseas Private Limited v.Pasupathi Fabrics Limited (supra) held that "Section 26 of SICA expressly bars the jurisdiction of any other judicial forum in interfering with a scheme framed by BIFR " and accordingly concluded that "any allegation relating to non compliance with the scheme has to be agitated before the BIFR in terms of the provisions of SICA " and further that the CLB would not interfere with the jurisdiction of BIFR, in relation to the matters arising out of a scheme sanctioned by BIFR.Haying found that the allotment of 20 lakhs of shares made on 25.04.2003 in favour of the respondent group is one of the substantial issues raised in the appeal pending before AAIFR, this Bench shall not interfere with the jurisdiction of BIFR/AAIFR, in relation to the matters arising out of the scheme sanctioned by BIFR, on the strength of the underlying principles of Section 26 of S1CA. It is far from doubt that SICA is aimed at reviving and rehabilitating sick industries. Towards this end, the provisions of Section 15 and 19 of SICA provide a scheme where a company which has become sick can register itself with BIFR which is vested with the powers under the provisions of the said Act which shall after making enquiry may provide for package for rehabilitation of the company and/or make the company viable to that the business of the company can continue. Whereas, Section 397/398 a code by itself containing special provisions empowering the CLB to make such orders as it thinks fit with a view to bringing to an end, the acts of oppression and mismanagement, complained of by any aggrieved members. Thus, the scope and jurisdiction of BIFR and CLB are in entirety different. Therefore, the plea of Shri R. Murari, learned Counsel that Section 26 does not provide for bifurcation of the subject matter of an action as in the case of proviso to Section 34(2)(a)(iv) of the Arbitration & Conciliation Act, 1996 providing for bifurcation of the subject matter does not merit any consideration. The principles laid down by the Apex Court in Sukanya Holdings Private Limited v. Jayesh H. Pandya (supra), having arisen in the context of the provisions of Section 8 of the Arbitration & Conciliation Act, in my considered view, have no application to the case on hand. 1, therefore, do not hesitate to conclude that the acts of mismanagement and statutory violations set out in the company petition could be bifurcated and dealt with separately and accordingly jurisdiction could be exercised by the Bench to adjudicate the disputed issues in regard to the alleged acts of mismanagement and statutory violations. Towards this end, the respondents will file counter to the main petition by 07.11.2005 and rejoinder, if any, by 30.11.2005. The Company petition will be heard on the alleged acts of mismanagement and statutory violations in the affairs of the Company on 07.12.2005 at 2.30 p.m. The parties are at liberty to agitate the grievances in relation to the impugned allotment of shares before AAIFR. With these directions, the application stands disposed of.