Companies Act Case Law U P Financial Corporation And Ors Vs Naini Oxygen And Acetylene Gas Ltd. And Anr.

Appeal (civil) 568 of 1987



DATE OF JUDGMENT: 22/11/1994



1994 SUPPL. (5) SCR 654

The Judgment of the Court was delivered by

SAWANT, J. The case of the appellant-State Financial Corporation [for short
the “Corporation”] is that it was established under the State Financial
Corporation Act, 1951 [hereinafter referred to as the “Act”]. On 10th
December, 1975, it sanctioned a term loan of Rs. 30 lakhs to the 1st
respondent – Company [for short the “Company”] payable in 17 half-yearly
installments by the 22nd of August, 1986. The Memorandum of Agreement
executed between the Corporation and the Company and the Deeds of Mortgage
and Hypothecation executed by the Company in favour of the Corporation,
inter alia provided for recall of the entire balance of the loan in the
event of default on the part of the Company in paying two installments of
the loan and further to recover the balance of loan as arrears of land
revenue. Accordingly, the Corporation disbursed Rs. 18 lakhs to the Company
in 1977 and Rs. 10 lakhs in1978. In 1979, the Acetylene Gas plant of the
Company was commissioned. In 1980, the Corporation disbursed the balance of
Rs. 2 lakhs to the company thus making the total payment of loan of Rs. 30
lakhs. In July 1981, the Oxygen Gas plant of the Company was also

2. The Company, however, made persistent defaults in repayment of the loan
installments with the result that the recovery certificate was issued
against it under Section 3 of the U.P Public Moneys [Recovery of Dues] Act.
The Company challenged the said recovery proceedings before the High Court
in W.P. No. 15648 of 1981 which, however, was withdrawn by it later.
Thereafter on 30th November, 1981, the Company filed Company Petition No.
23 of 1981 under Sections 397 and 398 of the Companies Act in the High
Court seeking removal of persons then in management on grave charges of
manipulation of accounts, re-allotment of forfeited shares etc.

On 25th March, 1982, the State Government issued Office Memorandum
enunciating a scheme for rehabilitation of sick units and setting up, inter
alia a State Level Inter-institutional Committee with power to approve loan
upto Rs. 30 lakhs. On 9th January, 1984, there was a compromise in Company
Petition No. 23 of 1981 whereunder the then management of the Company
started running the plants. On 30th November, 1984, the Joint Director of
Industries declared the Company to be a sick unit. On 5th October, 1985,
the State Level Inter-Institutional Committee suggested a Rehabilitation
Package which envisaged reschedulement of payment by the Company,
arrangement of finances by the Company, appointment of two Directors
nominated by the Corporation and execution of personal guarantee by the

On 19th October 1985, the Corporation wrote a letter to the Company
stipulating the said conditions of the package. On 28th November, 1985 the
terms of the Rehabilitation Package were acknowledged by the Company. On
5th December, 1985, the Board of Directors of the Corporation approved the
Rehabilitation Package, The Company, however, did not take any steps to
implement the Rehabilitation Package.

On 30th May, 1986, the Corporation issued to the Company notice under
Section 29 of the Act for recovery of Rs. 90,31,102.13 which was made up on
the principal amount of Rs. 30 lakhs, interest amount of Rs. 59,40,514.13
upto 31st March, 1986 and expenses of Rs. 90,588.00. The Company gave a
reply to the notice on 5th June, 1986.

On 13th June, 1986, the Corporation took over the industrial establishment
under Section 29 of the Act. On 11th August, 1986, the Corporation pointed
out to the Company that none of the conditions of the Rehabilitation
Package was compiled with On 1st October, 1986, the Company filed W.P, No.
16691 of 1986 in the High Court. On 16th December, 1986, the Corporation
declined to further liberalise the package. On 13th/15th January, 1987, the
High Court allowed the writ petition and directed the Corporation to hand
over the possession of the industrial unit to the Company without any
adjustment. On 5th March, 1987, this Court granted special leave and stayed
the operation of the High Court’s order and asked the Industrial
Reconstruction Bank of India [IRBI] to submit its report as to the
viability of the Company. On 29th January, 1988, the IRBI made a report
stating therein inter alia that after reschedulement and further infusion
of about Rs. 1 crore, the unit will be “marginally viable.”

On these facts, the question raised by me Corporation in this appeal is
whether the Corporation is obliged to invest a further sum of Rs. 1 crore
in the establishment and whether even after such investment the unit will
be viable or whether the Corporation should realise its loan from the sale
of me assets of the Company.

3, As against the aforesaid case of the Corporation, the contention of the
Company is that pursuant to me loan sanctioned by the Corporation, the
Company imported two heavy-duty compressors from the U.S.A. and
commissioned the Acetylene and Oxygen plants in 1979 and 1980
respectively. On account of the mismanagement of the majority group then
dominating the management of the company, the present management which
consisted of a minority of share-holders, had to institute proceedings in
the High Court under Sections 397 and 398 of the Companies Act, and in
February 1984 the High Court under a compromise order got the shares of the
then management transferred to the present management at the race value of
Rs. 10 per share. The equity capital invested by the present management
viz., D.P. Agrawal Group, therefore, became of the order of Rs. 18 lakhs:
Thereafter, me present management took various steps to revive the Company
which had become sick and brought the plants into running condition after
overhauling them at a considerable cost. For the purpose the present
management gave loans of about Rs. 30 lakhs to the Company. On this
investment, the total investment of the present management group became of
the order of about Rs. 50 lakhs.

4. On 30th November, 1984, the unit was declared sick by the Inter-
institutional Committee consisting of various State Government agencies
including the Corporation, this Committee was formed under die Government
Order dated 25th March, 1982. By the said G.O. the Committee had been given
full powers to take all steps to revive sick units in the State which were
found viable and which could be restored to health. The Committee had also
the power to wind up such units as were found not viable.

5. On 5th October, 1985, the State-level Inter-institutional Committee
which was presided over by the Commissioner, Allahabad Division, suggested
the Rehabilitation Package. On the same day, viz., 5th October. 1985 the
Board of the Corporation met and noted that the new management of the
Company had brought about Rs. 8.30 lakhs during 1984-85 and 1985-86 and
approved of the Rehabilitation Package suggested by the Committee. On 19th
October, 1985, the Corporation also issued to the Company a formal letter
communicating that the request for rehabilitation of the unit had been
considered arid the reliefs and concessions set out in the said letter had
been granted. The concessions included rescheduling of the payment of the
principal amount of the loan of Rs. 30 lakhs so as to require the said
repayment from 22nd August, 1987 to 22nd August, 1993. The concessions also
included the grant of interest-free funding on simple interest which was
made repayable from February 1987 to February, 1996. The penal and compound
interests were waived. The result of the grant of these concessions was
that the repayment of the amount due to the Corporation was only to
commence in 1987 and not before.

6. On 23rd December, 1985, the Commissioner and Director of Industries,
U.P. wrote to the Reserve Bank to place the matter relating to the Company
before the State Level Inter-institutional Committee for their final
decision and asked the Reserve Bank to request all departments including
the Corporation to stay their recovery proceedings till the final decision
was taken on the rehabilitation. On 6th January, 1986, the Reserve Bank
requested the Corporation to stay the recovery proceedings.

In spite of this and in spite of the fact that the matter concerning the
rehabilitation of the unit was pending consideration before the State Level
Inter-institutional Committee and the Corporation itself had granted
deferment of the repayment of the loan to 1987 to be completed in 1996, the
Corporation issued another recovery notice of 9th January, 1986. However,
on 18th January, 1986, the Head Office of the Corporation advised its
Allahabad branch to stay the recovery proceedings. On 2nd May, 1986, a
meeting of the State Level Inter-institutional Committee convened by the
Reserve Bank, was held and the representative of the Corporation informed
the Committee that the Corporation had stayed the recovery proceedings
against the Company in consultation with the Ganara Bank a proposal for
rehabilitation of the Company had been forwarded to the IRBI. The Committee
decided that the Reserve Bank will call a joint meeting of all the agencies
to take a decision in the matter. However, the Corporation once again
issued a recovery notice on 30th May, 1986. The Company replied to the said
notice on 5th June, 1986 stating that on account of the deferment of the
repayment scheduled by the Corporation itself, dues for which the notice
was issued were not payable before 1987 and further the whole matter of
rehabilitation was pending to be finalised.

7. Both the Acetylene and Oxygen plants, in the meanwhile, were working to
full capacity, the same being 24 hour continuous process plants. However,
oh 13th June, 1986, the Corporation got the factory sealed and the workers
were forcibly evicted from the factory. This arbitrary action of the
Corporation was criticised by all Government agencies and officers in
[written] letter which are on record. They are IRBI’s letter dated 30th
June, 1986, Canara Bank’s letters dated 14th, 16th arid 17th June, 1986;
letter dated 28th June, 1986 of the Commissioner, Rehabilitation Division
and the letter dated 30th June, 1986 of the Additional Director of
Industries. The Corporation, however, did not consider the advice given by
these institutions and instead wrote to me Company’s customers asking them
not to pay the dues of the Company’s bills and not to return the Company’s
empty cylinders [about 1000 of the value of about Rs. 20 lakhs]. The said
cylinders are now not traceable with the lapse of time.

8, On llth August, 1986, the Director of Industries again wrote to the
Reserve Bank requesting it to take up the matter of rehabilitation before
the State Level Inter-institutional Committee. On the same day, the
Corporation wrote to the Company agreeing to give to the Company the
possession of the unit stating that the IRBI shall prepare a total
rehabilitation proposal within three months and the Corporation will follow
the said proposal. The letter further stated that the present Directors of
the Company should give personal guarantee for the repayment of the
liabilities of the Corporation. On 21st August, 1986, the Company accepted
the terms stipulated by the Corporation in its said letter and also
confirmed that the Directors will give personal guarantee for such amounts
as were decided upon by the IRBI. On the same day, i.e. 21st August, 1986
the Reserve Bank wrote to the Director of Industries that in the meeting of
the State Level Inter-institutional Committee held on 2nd May, 1986, an
assurance was given by the representative of the Corporation that the
recovery proceedings against the Company had been stayed, and, therefore, a
decision was taken to call another meeting for the rehabilitation of the
unit Since, however, the Corporation had taken physical possession of the
unit, no further action could be taken pursuant to that decision. The
Reserve Bank in that letter also desired that the matter be taken up with
the State Government so that the Government could intervene to stay the
actions of the Corporation. By his letters of 29th August, 1986, the
Director of Industries advised the Corporation to withdraw its action and
allow the unit to run.

9. It was in these circumstances that the Company was forced to file the
writ petition in the High Court on lst August, 1986, The High Court had, by
its impugned judgment, found that the action of the Corporation was very
arbitrary and had directed it to restore the possession to the Company
forthwith. It had also directed the IRBI to prepare rehabilitation package
within four months of the restoration of the possession.

10. At the time the Corporation sealed the unit viz., on 30th June, 1986,
according to the Company, the value of its assets was about Rs. 96 lakhs.
This valuation had been done at the instance of the Corporation by a
registered valuer in the later part of 1985. Under the Rehabilitation
Package proposed by the Corporation, the Company was liable to pay to it
the principal amount of Rs. 30 lakhs and interest on it in deferred
installments from 1987 to 1993 and without any further interest on the said
interest amount in easy installments from 1987 to 1996. In addition, the
liabilities of the Canara Bank had already been quantified at Rs, 12.5
lakhs and the Bank had also to recover the said liabilities in easy
instilments. Thus, as against the assets of the Company worth Rs. 96 lakhs,
the total liabilities of the Company to the Corporation and the Canara Bank
together were between -Rs. 75 to 80 lakhs and these liabilities were also
to be discharged in easy installments upto 1996. Hence it is the case of
the Company that the impugned judgment of the High Court was perfectly

11. However, the Corporation obtained the stay of the said judgment from
this Court which has continued from 1987 to this day. The result has been
that the plants have continued to remain closed and the interest has
continued to accumulate on the dues of the Corporation and the Canara Bank.
The plants have, in the meanwhile become almost a junk, and the cylinders
worth Rs. 20 lakhs are not traceable. Today, the total value of the assets
including land and buildings has come down to Rs. 42 lakhs from Rs. 96
lakhs in 1986. It is, therefore, the contention of the Company before us
that the Corporation’s appeal should be dismissed and the Company should be
restored to the same position in which it had been on the date the stay
order was obtained in this appeal. It is contended that if the stay order
had not been obtained by the Corporation, the Company would have got the
possession of the plants in January 1987 in good condition and its
liabilities would have been only between Rs. 75 to 80 lakhs. The Company
further prays that the interest which lias accrued on the dues of the
Corporation should be waived and that on the dues of the Canara Bank should
be borne by the Corporation. It is further contended by the Company that as
per the order of this Court passed on 5th March, 1987, the IRBI has
submitted its report on 5th February, 1988 according to which the unit was
found viable. In this connection, the following passages from the said
report are relied upon by the Company.

‘ ‘Resolved that the proposal contained in memorandum of IRBI No. 8793/88
dated 1.12.88 for Sanction of Rupee term loan not exceeding Rs. 190 lakhs
(Rupees one hundred and ninety lakhs only) to Naini Oxygen and Acetylene
Gas limited (NOAG) towards the cost of proposed modernisation-cum-
rehabilitation scheme on the terms and conditions contained in Appendix Of
the memorandum, besides normal terms and conditions applicable to such loan
from IRBI, be and is hereby approved.”

xxx xxx

“In the light of IRBI having submitted a report on the Viability aspect of
NOAG as elaborated earlier, the Hon’ble Supreme Court has directed IRBI to
consider the report arid intimate its decision to this court UPFC sometime
in August, 1986 had communicated earlier to the Company its intention,
inter-alia, to follow the rehabilitation proposal approved by IRBI. In the
discussion with Canara Bank it appeared that the Bank was favourably
inclined to support rehabilitation proposal approved by IRBI. Meanwhile,
market study undertaken by M/s Development Consultant Pvt. Ltd., reflects a
favourable market condition for the proposed product mix of NOAG.”

The Report had provided for a package of reliefs and concessions relating
to the Corporation and the Canara Bank. Apart from the waiver of penal and
compound interests which had also been agreed to by the Corporation and
refunding of the simple interest which had also been agreed to by the
Corporation, the package proposed in the report, “interest holiday” during
the period of the closure of the factory, i.e. from the date of the take-
over of the factory to the date of the reopening of the same.

In this connection, the Company also pointed out that the IRBI was prepared
to give a term loan of Rs. 1.9 crores for making the unit profitable and no
additional finance was required either from the Corporation or the Canara
Bank. The Company had thereupon made an application to this Court for
permitting it to repair the machinery under the supervision of the
Corporation pending the disposal of the appeal. However, the Corporation
through its counsel had undertaken to cany out the said repairs itself, and
this was recorded by this Court in its order of 27th April, 1988. In spite
of the undertaking to carry out the repairs, the Corporation did not do so
with the result the Company was compelled to file an application for
contempt being CMP No. 2715 of 1989. That Contempt Petition is still
pending. The Company would, therefore, also be entitled to be compensated
for the losses caused to it on account of the non-fulfillment of the
undertaking given by the Corporation to the Court.

12. No doubt, there is nothing on record to explain certain events, viz.,
[i] when on 19th October, 1985 the Corporation had issued to the Company a
formal letter communicating to it its acceptance of the rehabilitation
package and grant of reliefs and concessions set but therein, what impelled
the Corporation to issue recovery notice on 9th January, 1986 which was
later on stayed by the Corporation itself on 18th January, 1986; [ii] if on
2nd May, 1986, the Corporation had informed the State-level Inter-
institutional Committee that it had stayed the recovery proceedings, what
impelled the Corporation once again to issue the recovery notice on 13th
May, 1986; [iii] if the Corporation itself had agreed by its letter on 19th
October, 1985 to reschedule the payment of loan from 1987 to 1996, what
impelled it to issue the said recovery notice on 13th May, 1986 when
admittedly as per the Corporation’s offer, the payment of loan and interest
from the Company was not due and when the entire matter of the
rehabilitation of the Company was under active consideration; [ivj what
impelled the Corporation on 13th June, 1986 to seal the unit and write to
the customers not to pay the bills and not to return the cylinders to the
Company; [v] when on llth August, 1986, the Corporation had written to the
Company agreeing to give it back the possession of the unit and to follow
the rehabilitation proposal that would be prepared by the IRBI on the
condition that the Directors of the Company would give personal guarantee
for the payment of the liabilities and the Company had accepted the terms
by its letter of 21-st August, 1986 and when the Director of Industries had
advised the Corporation on 12th August, 1986 to withdraw the recovery
notice, why had the Corporation not handed over the possession of the unit
to the Company; [vi] why had the Corporation not taken steps to repair the
machines, in spite of the undertaking given to this Court and [vii] why had
the Corporation not accepted the report of the IRBI submitted on 5th
February, 1988 to this Court when the IRBI was prepared to invest term loin
of Rs. 1.9 crores for making the unit marginally viable?

13. However, we cannot lose sight of the fact that the Corporation is an
independent autonomous statutory body having its own constitution and rules
to abide by, and functions and obligations to discharge. As such, in the
discharge of its functions, it is free to act according to its own light
The views it forms and the decisions it takes are on the basis of the
reformation in its possession and the advice it receives and according to
its own perspective and calculations. Unless its action is mala fide, even
a wrong decision taken by it is not open to challenge. It is not for the
courts or a third party to substitute its decision, however more prudent,
commercial or business like it may be, for the decision of the Corporation.
Hence, whatever the wisdom [or the lack of it] of the conduct of the
Corporation, the same cannot be assailed for making the Corporation liable.

14. It cannot further be forgotten that in the present case, the Company
had made persistent defaults in repayment of the loan-installments with the
result that recovery certificate had to be if sued against it under Section
3 of the U.P. Public Moneys [Recovery of Dues] Act. The then management had
mismanaged the Company and a Company Petition had to be filed seeking its
removal on grave charges of manipulation of accounts, re-allotment of
forfeited shares, etc. The non-discharge of the liabilities of the Company
was on account of the said fraudulent practices of me management. By 30th
May, 1986, the dues of the Company mounted to Rs. 90,31,10213 with the
result that on 13th June, 1986, the Corporation had to take over its
industrial establishment under Section 29 of the Act. The report of the
IRBI which was given at the instance of this Court On 29th January, 1988
had stated that the industrial unit could be made only marginally viable
provided another Rs. one crore were invested in it and the loan
installments were rescheduled. Between 1981 when the industrial
establishment was closed down and 1988 when the IRBI report was submitted,
the machinery of the establishment was lying idle and was almost rusty with
the result that by.1988, the value of the machinery had gone down
considerably, while its liabilities had gone up still further: In the
circumstances, if the Corporation thought that the revival of the unit even
after giving alt concessions and reliefs as per the package deal was
problematic and the Corporation will stand to lose whatever little it
could retrieve towards its dues, the Corporation could hardly be blamed
for the same.

15. We are, therefore, of the view that this is not a matter where the High
Court should have stepped in and substituted its judgment for the judgment
of the Corporation which should be deemed to know its interests better
whatever the sympathies the Court had for the prosperity of the Company. In
matters commercial, the courts should not risk their judgments for the
judgments of the bodies to whom that task is assigned.

If the situation was bad on the date of the impugned judgment, it has
become worse today. Between 1988 when the IRBI gave its report and this
day, the situation has worsened with the further deterioration of the
machinery and the spiraling of the liabilities. To grant any indulgence to
the Company at this stage will be akin to flogging a dead horse. In the
circumstances, we, allow the appeal and set aside the impugned judgment of
the High Court. The Corporation will now be free to proceed according to


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