INTERNATIONAL FINANCE CORPORATION, WASHINGTON v. BIHAR SPONGE & IRON LTD. & Ors.

Judgment

1. These writ petitions have been filed by the two secured creditors who had given foreign currency loan (FCL) to the sick company M/s. Bihar Sponge & Iron Ltd. (BSIL) impugning the order dated 21.6.2007 passed by the Appellate Authority for Industrial and Financial Reconstruction (AAIFR) which upheld the order dated 29.7.2004 passed by the Board for Industrial and Financial Reconstruction (BIFR). Since the issues involved in both the cases are same, both the writ petitions are being disposed of by this common judgment. W.P.(C) Nos.6915/07 & 3277/08 Page 2 of 27

2. BSIL became a sick company though it had achieved 100% production because of the devaluation of rupee against the Deutsche Mark (DM) whereby the company‟s liability rose from Rs.28.6 crores to Rs.73.67 crores. On 19.12.1996, BSIL was declared a sick industrial company and IFCI was appointed as an Operating Agency(OA) to formulate the scheme for revival of the company. After various proposals were discussed including circulation of an earlier Draft Rehabilitation Scheme (DRS), ultimately an amended DRS was circulated at the joint meeting of the creditors held on

15.2.2002. This DRS was accepted by a number of creditors but was opposed by the Industrial Finance Corporation (IFC) which mooted an alternative proposal of one time settlement. It was proposed by the IFC, the petitioner in W.P.(C) No.6915/07 that a sum of Rs.135 crores be paid to the secured creditors as follows: 65 crores to be paid upfront in cash by the promoters “i) including the Government of Jharkhand ii) Balance Rs.70 crores to be paid over a period of 10 years carrying interest @ 8% P.A. On Rupee Term Loan (RTL) and @ LIBOR on Foreign Currency Loan (FCL) loan from company‟s internal accruals. GOJ (Government of Jharkhand) was required to furnish the guarantee for timely payment of balance Rs. 70 crores.”

3. This alternative proposal put forth by IFC on 18.1.2002 with cut off date as 30.9.2001 was discussed between the creditors and accepted by them. There were further developments, discussions and proceedings before W.P.(C) Nos.6915/07 & 3277/08 Page 3 of 27 BIFR as regards DRS. However, at the hearing held on 17.2.2003, BIFR considering the DRS passed an order as follows: “(i) GOJ would decide in three weeks whether they are agreeable to extend the reliefs and concessions as provided in the DRS including investment of Rs.50 crores in the company and guaranteeing the repayment of the balance OTS dues to the secured creditors. However, in case GOJ is not agreeable to extend their support to the DRS as circulated by BIFR vide order dated 27.11.2002 or no agreed rehabilitation proposal is received from the private promoters, the OA would issue advertisements in leading newspapers within takeover/leasing/amalgamation/ merger for rehabilitation with or without OTS of the dues of FIs and Banks....” 2 weeks inviting

4. The Patna High Court in a writ petition filed by Bihar State Industrial Development Corporation (BSIDC) on 2.9.2003 ordered the sick company to deposit Rs.12 crores in a no lien account with the OA by

08.09.2003. The Hon‟ble High Court further directed that in the event the said deposit is made within time, the OA will not proceed with the direction of BIFR for issue of an advertisement for change of management.

5. A Special Leave Petition was filed by IFC in the Hon‟ble Supreme Court challenging the Patna High Court order dated 2.9.2003 and seeking transfer of the writ petitions preferred by the company and also by BSIDC. The same was listed for hearing on 23.4.2004. After hearing the parties the Hon‟ble Supreme Court observed as follows: W.P.(C) Nos.6915/07 & 3277/08 Page 4 of 27 “The reasoning of the BIFR in the order dated 17.2.2003 cannot be faulted. Sufficient opportunities appeared to have been given at every stage to the private promoters and the Government of Jharkhand to invest the amounts as proposed in the scheme of IFCI. The order for advertisement may give a better deal to the secured creditors to give a last chance to the private promoters and the Government of Jharkhand to take advantage of the scheme framed by IFCI instead allowing the appeal right away, we direct (emphasis supplied); (1)... the private promoters shall deposit an amount of Rs.32.50 crores by 12.7.2004 with the IFCI....... (2)....The State‟s offer to give Rs.32.50 crores under the IFCI scheme is also hedged in by several conditions, namely, that the assistance would be given under the provisions of the Jharkhand Industries Rehabilitation Scheme 2003; the assistance would be considered only when the BIFR approved the proposal after taking consent of the financial institutions and the State Government and only if the security would be given to the State in terms of the guidelines prescribed by the Reserve Bank of Nationalized Banks. India We are not prepared to impose any such conditions as far as the State‟s participation in the scheme is concerned. The issue of security in respect of the loan must be worked out between the State and the promoters, if it so desires. It is being made clear that the State‟s securities, if any, in the company‟s assets can only be subject to the claims of the secured creditors who are already before the BIFR....” While approving BIFR‟s order dated 17.02.2003, the Hon‟ble Supreme Court made certain modifications to the DRS, which had earlier been approved by all the secured creditors.

6. On 12.7.2004, when the aforesaid appeal came up for hearing, the Hon‟ble Supreme Court passed the following order: “The deposit has been made by the State of Jharkhand of an amount of Rs.32.50 crores with the operating agency, namely, I.F.C.I within W.P.(C) Nos.6915/07 & 3277/08 Page 5 of 27 the time specified in the order dated 23rd April, 2004. This, therefore, leaves two questions to be determined, one of the approval of the draft scheme and the other is distribution of Rs.65 crores at present being held by the IFCI. Both these questions should be left to the Board of Industrial and Financial Reconstruction who will dispose of the matter within a period of two weeks from date subject to the parties communicating this order to the Board forthwith. Any objection to the draft scheme which the parties may have, may be taken before the BIFR. As far as the second question is concerned the IFCI will in the meanwhile and, if possible, within one week, distribute the amount of Rs.65 crores amongst calculations. In the event there is any dispute as to the quantum receivable by any secured creditor the matter may be taken up by such secured creditor before the Board. the secured creditors according The application for impleadment is allowed. The civil appeal is disposed of accordingly. The cases which are transferred, are disposed of in terms of the order dated 23.4.2004 read with the order passed today.”

7. At the hearing subsequently held on 29.7.2004 before BIFR the impugned order was passed in which inter alia it was observed by BIFR as under: “.... The issue basically boiled down to whether the Government Guarantee could be compensated by an interest charge of 1% or 3%. He, therefore, suggested that interest on FCL could be paid at LIBOR+1%....The representative of the secured creditors agreed with the OA‟s suggestion. The representative of the IFCI(OA) further submitted that the amount of Rs.65 crores had been distributed among the secured creditors on the basis of rupee value of their principal outstanding dues and no cushion was available for giving higher amounts. However, cushion of 5% had been built into the scheme in respect of balance Rs.70 crores payable over the next 7 years.” W.P.(C) Nos.6915/07 & 3277/08 Page 6 of 27

8. The aforesaid shows that BIFR on considering the submission made by OA that increase of 3% interest on FCL would adversely affect the liability of the company and Debt Coverage Service Ratio (DCSR) would go below 1.33, which in turn will make the scheme non viable and duly considering the submission made on behalf of IFC suggesting that the interest on FCL should be payable at LIBOR +3% in lieu of non availability of guarantee (which was to be furnished by the Government of Jharkhand) directed that the instalments in respect of both Rupee Term Loans (RTL) and FCL would be payable at quarterly intervals and the sick company would pay 1% incremental interest to the secured creditors in lieu of Guarantee which was supposed to be given by GOJ but not given. The BIFR also observed that the rupee value of the foreign currency dues had been crystallized as on 30.09.2001 and since there was no cushion available in respect of the upfront payment made in respect of the FCL, no additional amounts could be paid to the creditors. By its order dated 29.07.2004 BIFR sanctioned the Draft Rehabilitation Scheme with certain modifications in spite of the aforesaid objections of the writ petitioners.

9. This order of BIFR was challenged by IFC by raising the two following issues: i) Denial of interest @ LIBOR+3% for the Foreign Currency Lenders (FCL) by the BIFR was illegal as the DRS was wrongly amended by BIFR without taking consent to the petitioners/secured W.P.(C) Nos.6915/07 & 3277/08 Page 7 of 27 creditors and which consent was mandatory under Section 19 of Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) ii) Denial of the liability of the company to make good the shortfall/deferential amount on the upfront payment which was on account of exchange rate fluctuation on the date of payment as against the cut of date of 30.09.2001 was unjustified. Similar were the objections of DEG before AAIFR, the other secured creditor who has filed the W.P.(C) No.3277/08. It was contended by the writ petitioners before AAIFR that despite the recording of the objections taken by IFC and DEG, and the clear position where the FCL lenders had expressed their consent to the scheme only subject to payment of LIBOR+3% interest and payment of shortfall due to foreign exchange fluctuation, BIFR proceeded to pass the impugned order and recorded at para 15 concluding that the additional 1% interest would be payable in lieu of the interest as originally provided for in the scheme by all secured creditors and thereby approved the scheme providing for LIBOR+1% for FCL as opposed to the agreed LIBOR+3% interest rate demanded by the writ petitioners. It was argued that the sick company in the SLP in the Supreme Court had filed an affidavit agreeing to pay LIBOR + 3% which the company cannot back out of.

10. AAIFR, therefore, crystallized the first aspect which required its decision in paragraph 30 of the impugned judgment which reads as under: “30. The issue relevant for adjudicating the dispute according to the appellants is whether BIFR can scale down a liability or dilute any of the terms of sacrifices and financial assistance and compel W.P.(C) Nos.6915/07 & 3277/08 Page 8 of 27 a secured creditor to consent to a scheme contrary to the acceptable terms to such a creditor and (b)-whether it is open for BIFR to substitute its own discretion judgment in place of the secured creditor‟s business judgment.”

11. Before this Court also the same arguments were raised as were raised before BIFR and AAIFR. An additional issue has also been urged on behalf of the respondent herein and which was that the order of BIFR dated

29.7.2004 was a consent order, therefore, appeal did not lie against the said order to AAIFR.

12. AAIFR on the two issues held as under: “41. On the first issue it is clear that in the event Government of Jharkhand had furnished guarantee the payment of OTS dues of IFC (W) and DEG would have been subject to payment of interest at LIBOR; whereas BIFR had allowed interest at LIBOR+1% since the guarantee of Government of Jharkhand was not forthcoming. However, the financial interests of IFC(W) and DEG are not adversely affected as a result of the scheme approved by BIFR. On the second issue the submission made in writing and 42. suggestions/objections in respect of the DRS circulated in 2004 was considered and overruled by BIFR in the hearing held on 29.7.2004, when the impugned order was passed. In the absence of consent BIFR has the power to adopt such other measures as may be deemed fit in the interests of reviving the company.”

13. So far as the issue that BIFR could not have amended the draft scheme as was approved by the secured creditors by reducing the future interest on payment of the balance amount of Rs.70 crores from LIBOR +3% to LIBOR +1%, the issue is really one that whether consent of all the secured creditors is W.P.(C) Nos.6915/07 & 3277/08 Page 9 of 27 necessary for approval of any modification to a DRS by BIFR i.e. without the consent of the secured creditors under Section 19 of SICA can there not be modifications to a DRS which was circulated and accepted by the secured creditors. We have recently had an occasion to consider this aspect in W.P.(C) No.8644/09 titled as Oman International Bank S.A.O.G. Vs. AAIFR decided on 5.5.2010 and in which we have held that it is not mandatory to seek consent of all the secured creditors for approval of a draft scheme and modifications can be made thereto by BIFR as it thinks fit for revival of the sick company. We have, therefore, approved what has been held by AAIFR in para 42 of the impugned judgment reproduced above. Our reasoning in the case of Oman International Bank S.A.O.G. Vs. AAIFR is contained in paras 7 to 11 and 13 of the said judgment and which read as under: “7. may be referred to at this stage, and which reads as follows: The Statement of objects and reasons of SICA “Statement of objects and reasons The ill effects of sickness in industrial companies such as loss of production, loss of employment, loss of revenue to the Central and State Governments and locking up of investible funds of banks and financial institutions are of serious concern to the Government and the society at large. The concern of the Government is accentuated by the alarming increase in the incidence of sickness in industrial companies. It has been recognized that in order to fully utilize the productive industrial assets, afford maximum protection of employment and optimize the use of the funds of the banks and financial institutions, it would be imperative to revive and rehabilitate the potentially viable sick industrial companies as quickly as possible. It would also be equally imperative to salvage the productive assets and realize the amounts due to the banks and financial institutions, to the extent W.P.(C) Nos.6915/07 & 3277/08 Page 10 of 27 possible, from the non-viable sick industrial companies through liquidation of those companies. It has been the experience that the existing institutional arrangements and procedures for revival and rehabilitation of potentially viable sick industrial companies are both inadequate and time-consuming. A multiplicity of laws and agencies makes the adoption of coordinated approach for dealing with sick industrial companies difficult. A need has, therefore, been felt to enact in public interest a legislation to provide for timely the preventive, determination by a body of experts of ameliorative, remedial and other measures that would need to be adopted with respect to such companies and for enforcement of the measures considered appropriate with utmost practicable dispatch. The salient features of the Bill are- (i) application of the legislation to the industries specified in the Final Schedule to the Industries (Development and Regulation) Act, 1951, with the initial exception of the scheduled industry relating to ships and other vessels drawn by power, which may however be brought within the ambit of the legislation in due course; (ii) identification of sickness in an industrial company, registered for not less than seven years, on the basis of the symptomatic indices of cash losses for two consecutive financial years and accumulated losses equaling or exceeding the net worth of the company as at the end of the second financial year; (iii) the onus of reporting sickness and impending sickness at the stage of erosion of fifty per cent. or more of the net worth of an industrial company is being laid on the Board of Directors of such company; where the Central Government or the Reserve Bank is satisfied that an industrial company has become sick, it may make a reference to the Board, likewise if any State Government, scheduled bank or public financial institution having an interest in an industrial company is satisfied that the industrial company has become sick, it may also make a reference to the Board; (iv) establishment of Board consisting of experts in various relevant fields with powers to enquire into and determine the incidence of sickness in industrial companies and devise suitable W.P.(C) Nos.6915/07 & 3277/08 Page 11 of 27 remedial measures proposals and for proper implementation thereof; through appropriate schemes or other (v) constitution of an Appellate Authority consisting of persons who are or have been Supreme Court Judges, senior High Court Judges and Secretaries to the Government of India, etc., for hearing appeals against the order of the Board.” (Emphasis added) A reading of the aforesaid Statement of objects and 8. reasons shows that the effect of sickness in industrial companies is of serious concern not only to the government but also to the society at large. The objects and reasons further show that there is a need to fully utilize the productive industrial assets and afford maximum protection to employment and it is imperative to revive and rehabilitate the potentially viable sick industrial companies. When we read the aforesaid Statement of objects and reasons alongwith Section 20 of the Act, it becomes clear that winding up of a company is to be resorted to only as a last eventuality and only when it becomes just and equitable to wind up the sick industrial company. That the proposition as was very vehemently canvassed on behalf of the petitioner has no legs to stand upon becomes clear also from the expression “one or more” as found in Section 18 of the Act. The expression „one or more‟ includes „all‟ i.e. all measures including financial concessions. This expression “one or more” indicates that more than one eventuality can be adopted and acted upon by BIFR to rehabilitate and revive a sick industrial company and not only one eventuality of resorting to other sub sections of Section 18 except its sub section (1)(e) . Section 19(4) will have to be harmoniously construed with the expression „one or more‟ as found in Section 18 so as to further the object of the Act. There cannot be a reading of the provisions of Section 19(1) and 19(4) of the Act in the manner as is suggested by the learned senior counsel for the petitioner further becomes abundantly clear when we read Section 18(3)(b) of the Act alongwith the expression “the Board may adopt such other measures” as found in Section 19(4). In our opinion, this expression “the Board may adopt such other measures” cannot be restricted to only measures other than those prescribed under Section 18(1)(a) and 18(1)(e) of the Act. Section 18(3)(b) states categorically that the Board would make modification to a scheme of revival and rehabilitation of a company in case of any objection from a creditor, therefore, a W.P.(C) Nos.6915/07 & 3277/08 Page 12 of 27 conjoint reading of Section 18(3)(b), Section 19(1) and Section 19(4) shows that the other measures which are talked of in Section 19(4) would be the modification of a scheme in the light of the objections of a secured creditor, however, the same cannot mean that the objections can prevent the drawing up and implementation of a sanctioned scheme by an obdurate minority secured creditor. In fact, we must point out that a company becomes sick only because its net worth is eroded and it is unable to pay its creditors and when we talk of revival and rehabilitation of sick company as a first step and measure ordinarily and in a vast majority of cases, at the outset, BIFR has necessarily to bring about a composition between the creditors by bringing about reduction of their claims and dues of the sick company towards the creditors by adopting a principle which would treat the secured creditors fairly and equally, depending of course on the facts and circumstances of each case. promulgation the Securitization

9. There is yet another reason why we cannot accept the arguments as urged on behalf of the petitioner that a single creditor can prevent BIFR in bringing about a scheme which envisages reduction in the dues payable by the sick company to its secured creditors. This additional reason is the amendment which has been brought about to SICA by Section 41 and schedule of the Act 54 of 2002 which amended Section 15 of SICA Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. As a result of this amendment, a third proviso has been brought about in sub Section (1) of Section 15 that the secured creditors who represent not less than 3/4th in the value of the amount outstanding against financial assistance disbursed to the sick company can bring about an abatement of proceedings pending before BIFR. This proviso reads as under: “Provided also the commencement of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, where a reference is pending before Industrial and Financial Reconstruction, such reference shall abate if the secured creditors, representing not less than three-fourth in value of the amount outstanding against financial assistance disbursed to the borrower of such secured creditors, have taken any measures to recover their secured debut under sub-section(4) of section 13 of that Act.” that on or after the Board W.P.(C) Nos.6915/07 & 3277/08 Page 13 of 27 A plain reading of this proviso added by the Act 54 of 2002 shows that the consent of at least 3/4th of the secured creditors is necessary for the proceedings before BIFR to abate. This proviso further brings into focus the legislative intent that a minority creditor cannot frustrate the proceedings before BIFR for rehabilitation and revival of the sick industrial company. The Legislature has thought it fit that at least 75% of the secured creditors must join hands to bring about an abatement to the proceedings before BIFR. If that be so, it cannot be understood as to how one secured creditor can in fact bring about an abatement of the proceedings before BIFR because giving of financial concessions by reducing the dues payable by a sick industrial company is always the heart and basic structure of any scheme for revival and rehabilitation of a sick industrial company. After all, if no financial concession in the form of reduction of dues payable by a sick company to its creditors is given, then, what will be the use of other measures under Section 18 such as change of management or sale/lease of assets of a sick company and so on. None of these other measures would in themselves help in rehabilitation and revival of the sick industrial company and which measures could have been adopted by the sick company without being a sick company governed by SICA. It is for this reason that the Legislature has advisedly and intentionally used the expression “one or more” as found in Section 18, and which aspect we have already adverted to above that the Board may take one or more measures i.e. it is not confined only to one measure of refusing financial assistance by means of concession to a sick industrial company. Revival of a sick industrial company is a complex process involving discussions with secured creditors, other creditors, labour and other personnel employed with the company, dues of the revenue authorities and so on. If such complex procedure can be frustrated and set at naught by a single secured creditor, then, what is the purpose and use of enactment of SICA.

10. That the Statement of objects and reasons of SICA ought to be referred to for interpreting the provisions of the Act is clear from various judgments of the Supreme Court including the judgments reported as KSL and Industries Ltd. Vs. M/s. Arihant Threads Ltd. & Ors. 2008 (9) JT 381: 2008 (12) SCR 702, Morgan Securities and Credit Pvt. Ltd. Vs. Modi Rubber Ltd. AIR 2007 SC 683: 2006 (14) Scale 267 and M/s. W.P.(C) Nos.6915/07 & 3277/08 Page 14 of 27