Case Note & Summary
The dispute arose from the rehabilitation of Flowmore Polyesters Ltd, a sick industrial company closed since August 1990. The Board for Industrial and Financial Reconstruction (BIFR) declared Flowmore sick under the Sick Industrial Companies (Special Provisions) Act, 1985 and appointed IFCI as operating agency to examine revival proposals. SRF Limited proposed a merger of Flowmore with itself, while Garware Plastics and Polyesters Ltd and Assam Asbestos Limited submitted stand alone revival schemes. Despite repeated notices and opportunities, Garware failed to submit a revised scheme and instead offered technical assistance to AAL. BIFR approved SRF's merger scheme on November 19, 1993, after SRF gave up the benefit of Section 72-A of the Income Tax Act. Garware challenged the BIFR order before the Appellate Authority and then filed a writ petition, which was transferred to the Delhi High Court. The Delhi High Court set aside the BIFR and Appellate Authority orders, holding that Garware was an interested person entitled to notice and that the merger scheme entailed financial sacrifice at the cost of the central exchequer without notice to the Central Government or Central Board of Direct Taxes. The appellants SRF, Flowmore, and a shareholder challenged the High Court's decision before the Supreme Court. The appellant's counsel argued that Garware was not an interested person because it had failed to submit a revised scheme, lacked bona fides, and intended to delay revival of a trade rival; the appeal also conceded that notice to the Central Government and CBDT was necessary but argued that SRF had expressly given up Section 72-A benefits. The Supreme Court considered the contentions on locus standi, natural justice, and financial sacrifice under the tax provision. The final operative part of the judgment is not available in the provided text.
Headnote
A) Sick Industrial Companies (Special Provisions) Act, 1985 - Revival Scheme - BIFR's Power to Approve Merger - Sections 15(1), 17(3) - Flowmore was declared a sick industrial company by BIFR under Section 15(1) and IFCI was appointed as operating agency under Section 17(3) to examine revival proposals including amalgamation with healthy companies or change of management. SRF submitted a merger proposal while Garware and AAL submitted stand alone schemes, and after repeated opportunities, BIFR approved SRF's rehabilitation-cum-merger scheme on November 19, 1993. (Paras 2-6)
B) Natural Justice - Notice to Interested Parties - BIFR Order Without Notice - The Delhi High Court set aside BIFR's orders dated November 19, 1993 and January 27, 1994 and the Appellate Authority's order dated January 28, 1994 on the ground that Garware was an interested person and the order approving the merger scheme was passed without notice to Garware, violating principles of natural justice and fair play. The High Court also noted that the merger scheme entailed huge financial sacrifice at the cost of the central exchequer without notice to the Central Government or Central Board of Direct Taxes. (Para 7)
C) Locus Standi - Interested Person under SICA - Rival's Failure to Submit Revised Scheme - The appellant contended that Garware was not an interested person because it failed to submit a revised scheme despite repeated opportunities and had contracted with AAL to provide technical assistance instead of pursuing its own revival proposal. The appellant argued that Garware lacked bona fides, was a trade rival intending to delay revival, had filed a writ petition in Bombay High Court without territorial jurisdiction, and had acquiesced to BIFR's orders. (Para 8)
D) Tax Concession - Section 72-A Income Tax Act - Undertaking to Give Up Benefits - BIFR initially noted that SRF's scheme had a demerit because it envisaged a tax shield of Rs. 10.17 crores at the cost of the Central Exchequer under Section 72-A of the Income Tax Act. However, SRF expressly gave up Section 72-A benefits by letters dated March 23, 1993 and April 16, 1993, leading to a review petition and eventual rectification of the order by BIFR in November 1993. (Paras 4-6)
Issue of Consideration
Whether Garware, having failed to submit a revised revival scheme despite repeated opportunities, could be treated as an interested person entitled to notice and hearing by BIFR; whether the Delhi High Court was justified in setting aside BIFR's approval of the merger scheme on grounds of natural justice and financial sacrifice under Section 72-A of the Income Tax Act.
Law Points
- BIFR discretion under Sick Industrial Companies (Special Provisions) Act
- 1985 to approve revival scheme
- notice to interested parties
- natural justice
- Section 72-A Income Tax Act tax shield
- locus standi of rival
- merger versus stand alone revival
- acquiescence
- territorial jurisdiction abuse
Case Details
1995 LawText (SC) (03) 10
K. Ramaswamy, N. Venkatachala
1995 AIR 2228, 1995 SCC (3) 465, JT 1995 (3) 11, 1995 SCALE (2) 187
M/S S.R.F. Limited; M/s Flowmore Polyesters Ltd; B.P. Mittal
M/S Garware Plastics and Polyesters Ltd. and Ors.
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Nature of Litigation
Civil appeal by special leave against the Delhi High Court's judgment and order setting aside BIFR's approval of a revival-cum-merger scheme for a sick industrial company.
Remedy Sought
The appellants sought to set aside the Delhi High Court's order and restore the BIFR's decision approving the merger scheme submitted by SRF Limited for the revival of Flowmore Polyesters Ltd.
Filing Reason
The Delhi High Court allowed the writ petition filed by Garware Plastics and Polyesters Ltd, holding that the BIFR order dated November 19, 1993 was made without notice to an interested person and involved financial sacrifice at the cost of the central exchequer, and remitted the matter to BIFR.
Previous Decisions
BIFR approved SRF's rehabilitation-cum-merger scheme by order dated November 19, 1993; the Appellate Authority for Industrial and Financial Reconstruction dismissed Garware's appeal on January 28, 1994; the Delhi High Court set aside these orders and remitted the matter to BIFR for reconsideration.
Issues
Whether Garware, after failing to submit a revised revival scheme despite repeated opportunities, could be considered an interested person with locus standi to challenge BIFR's order approving SRF's merger scheme.
Whether BIFR's order approving the merger scheme without notice to Garware violated principles of natural justice and fair play.
Whether the merger scheme entailed a huge financial sacrifice at the cost of the central exchequer under Section 72-A of the Income Tax Act, requiring notice to the Central Government and Central Board of Direct Taxes.
Whether the Delhi High Court was justified in setting aside the BIFR and Appellate Authority orders and remitting the matter for reconsideration.
Submissions/Arguments
Garware was not an interested person because it failed to submit a revised scheme despite repeated opportunities and had contracted with AAL to provide technical assistance instead of pursuing its own revival proposal.
Garware lacked bona fides and intended to delay the revival of its trade rival by filing a writ petition in Bombay High Court at Aurangabad, which had no territorial jurisdiction.
Garware had acquiesced to the orders passed by BIFR at different dates and did not participate in subsequent proceedings, indicating lack of genuine interest in reviving the sick company on a stand alone basis.
BIFR was justified in concluding that SRF alone was in the field to revive Flowmore.
The appellant conceded that notice to the Central Government and Central Board of Direct Taxes was necessary but argued that SRF had expressly given up Section 72-A benefits under the Income Tax Act.
Judgment Excerpts
The High Court set aside the orders of BIFR dated November 19, 1993 made without notice to Garware noting that it was violative of principle of natural justice and fair play.
Garware at no point of time had evinced any interest after rejecting its revival scheme by BIFR nor did it submit fresh proposals.
The consistent conduct of Garware would show that Garware is not an interested person.
By order dated November 1993, BIFR had rectified the mistake.
Procedural History
Flowmore Polyesters Ltd was closed in August 1990 and declared a sick industrial company by BIFR on December 6, 1991 under Section 15(1) of SICA. IFCI was appointed as operating agency under Section 17(3) to prepare a revival package. SRF, Garware, and AAL submitted revival proposals; SRF proposed merger while Garware and AAL proposed stand alone revival. Garware failed to appear at hearings on October 5, 1992 and March 18, 1993, and did not submit a revised scheme despite repeated directions. On April 23, 1993, BIFR approved SRF's scheme but noted the demerit of tax shield under Section 72-A; SRF had given up that benefit by letters dated March 23 and April 16, 1993. SRF filed a review petition on May 4, 1993, and BIFR rectified the error by order in November 1993. SRF also filed an appeal before AAIFR, which was dismissed on May 1993 as the order was interim. A joint meeting of banks and institutions on June 10, 1993 agreed to SRF's merger proposal. ATCO, which had earlier proposed to assist AAL, backed out and its appeal and writ petition were dismissed or withdrawn. On November 19, 1993, BIFR accepted SRF's rehabilitation-cum-merger scheme and directed publication with hearing on January 27, 1994. Garware filed an appeal before AAIFR on January 14, 1994, which was dismissed on January 28, 1994. Garware also filed a writ petition in Bombay High Court at Aurangabad on January 21, 1994, which was transferred to Delhi High Court. On August 8, 1994, the Delhi High Court allowed the writ petition, set aside the BIFR orders dated November 19, 1993 and January 27, 1994 and AAIFR order dated January 28, 1994, and remitted the matter to BIFR. The present appeals by special leave were filed against that order.
Acts & Sections
- Sick Industrial Companies (Special Provisions) Act, 1985 (SICA): Section 15(1), Section 17(3)
- Income Tax Act, 1961: Section 72-A
