M/s Brahma Steyr Tractors Limited & Anr. v. The Punjab State Industrial Development Corporation Limited

Judgment

1. This petition seeks quashing of notice dated 30.8.2007, Annexure P-1, under Section 29 of the State Financial Corporations Act, 1951 (for short, “the SFC Act”) and further consequential order dated 27.2.2008, Annexure P-3.

2. Case set out in the petition is that petitioner No.2 M/s Metal Corporation of India Ltd. entered a Memorandum of Understanding (MOU) with the respondent State Industrial Development Corporation Limited on 31.1.1992, which is a financial corporation under Section 3 of the SFC Act. The agreement was to set up a unit for manufacture of agricultural tractors and C.W.P. No.3357 of 2008 2 components in joint sector. Petitioner No.1 M/s Brahma Steyr Tractors Limited was set up as a Joint Venture Company. On 7.12.1995, a Financial Collaboration Agreement (FCA) was entered into between the petitioner No.2 and the respondent-Corporation. The respondent Corporation was to contribute Rs.782 lacs towards equity share capital. On 7.1.1996, a sum of Rs.250 lacs by way of loan, in lieu of equity, was advanced. On 29.1.1998, term loan of Rs.75 lac was advanced. On

13.5.1999, temporary loan of Rs.66 lac, in lieu of equity was advanced. Thus, total amount advanced to the petitioner was 391 lac. The respondent Corporation issued notice dated 20.6.2000 (Annexure P-11) for recalling the loan including the loan disbursed to the petitioners in lieu of equity, alongwith interest. There was correspondence between

the parties and finally, impugned notice under Section 29 of the SFC Act was issued by the Corporation. The petitioner challenged the notice by filing C.W.P. No.14516 of 2007, which was disposed of on

17.9.2007, with a direction to decide the representation of the petitioners by a speaking order. The said representation of the petitioners has been rejected vide order dated 27.2.2008 (Annexure P- 3).

3. Contentions raised in the petition are that as against term loan of Rs.75 lac, the Corporation is already holding Fixed Deposit Receipts of Rs.85 lac since 2.6.2004 and the petitioner is willing to adjust the said amount and even to pay any further interest, if due. As regards rest of the amount, stand of the petitioners is that the same was by way of equity participation, on which C.W.P. No.3357 of 2008 3 no interest was payable. The Corporation wrongly treated the same as loan, even though according to the terms of Collaboration Agreement, the same was required to be treated as equity. The petitioner No.1 took all the steps on its part, as per the Collaboration Agreement and was not responsible for failure of the project. It is further submitted that reference has been made to arbitral Board on account of disputes between the parties, at the instance of the respondent-Corporation. According to the Claim Petition filed before the Arbitral Tribunal, Annexure P-4, respondent-Corporation has made a claim of the amount in dispute which is also covered by impugned notice before the Arbitrator. The Corporation having elected the remedy of arbitration, was estopped from invoking Section 29 of the SFC Act. It is also submitted the remedy for recovery of amount advanced towards equity was available only before the Company Law Board under the Companies Act, 1956.

4. In the reply filed by the respondent Corporation, it has been submitted that Section 29 of the SFC Act was a special provision which could be invoked irrespective of any other remedy. On facts, stand of the Corporation is that the amount covered in the impugned notice was not subject matter of dispute before the arbitral Board. The Corporation was not liable to treat the amount of loan advanced as equity, as the project did not fructify within seven years from the date of signing of the FCA, which entitled the Corporation to recover the amount, treating the same as loan. The Corporation has, apart from the above amount of Rs.391 lac, C.W.P. No.3357 of 2008 4 advanced a further sum of Rs.1.92 crore towards equity, which it was entitled to get back as the petitioner was under obligation to buy back the share holding since the project did not fructify and dispute before the arbitral Board is confined to recovery of Rs.1.92 crore with interest.

5. We have heard learned counsel for the parties and with their assistance, perused the relevant documents, particularly the impugned notice, the MOU and the FCA.

6. Learned counsel for the petitioners made following submissions:- i) The Arbitration and Conciliation Act, 1996 was a special Act and once the respondent Corporation invoked the arbitration Clause, as per FCA, the respondent Corporation will be debarred from invoking Section 29 of the SFC Act. Reliance has been placed on judgment of the Hon’ble Supreme Court in A.P. Financial Corporation v. M/s GAR Rerolling Mills & another AIR 1994 SC 1351; ii) The respondent Corporation being a share-holder in joint venture, remedies of respondent were to approach the Company Law Board under the provisions of the Companies Act, 1956, especially under Sections 108, 111, 397, 398 and 402 of the Companies Act, 1956; iii) The amount other than Rs.75 lac having been advanced as loan in lieu of equity, could not be treated as loan for the purpose of invoking Section 29 of the SFC Act. For the amount of Rs.75 lacs, the petitioner’s FDR for Rs.85 lacs was already available to the respondent. C.W.P. No.3357 of 2008 5

7. Learned counsel for the respondent Corporation opposes the submissions made on behalf of the petitioners and submits that the scope of remedy under the Arbitration Act was confined to recover the amount paid towards equity i.e. Rs.1.92 crore with interest. Other amounts mentioned in the statement of claim, Annexure P-2, have been mentioned only for narrating the facts and the cause of action. In such a situation, the doctrine of election was not applicable and the judgment of the Hon’ble Supreme Court in A.P. Financial Corporation (supra) is distinguishable. Section 29 of the Act was a special provision and statutory remedy available to the respondent. Invoking of Arbitration Clause cannot be applied as estoppel against use of said statutory remedy. Accordingly, absence of taking remedy under the provisions of Companies Act, 1956 by moving the Company Law Board was also not a bar to invoke Section 29 of the SFC Act, particularly when stand of the respondent Corporation was that the amount was advanced towards loan and not liable to be treated as equity. Though it was initially styled as loan in lieu of equity, the same was never converted into equity and continues to be a loan. The petitioners failed to comply with the conditions as per which the loan amount could be converted into equity and decision of the Corporation to take the amount as loan has never been challenged by the petitioners either by way of arbitration or otherwise. Learned counsel for the Corporation relied upon judgments of the Hon’ble Supreme Court in U.P. Financial Corporation v. Gem Cap (India) Pvt. Ltd. and others (1993) 2 SCC C.W.P. No.3357 of 2008 6 299, Maharashtra State Financial Corporation v. M/s Suvarna Board Mills and another (1994) 5 SCC 566, U.P. Financial Corporation and others v. Naini Oxygen & Acetylene Gas Ltd. and another (1995(2) SCC 754, Haryana Financial Corporation and another v. Jagdamba Oil Mills and another (2002) 3 SCC 496 and Karnataka State Industrial Investment & Development Corporation Ltd. v. Cavalet India Ltd. and others (2005) 4 SCC 456, on the scope of invoking the provisions of Section 29 of the SFC Act and also on the scope of interference by this Court. Reliance has also been placed on judgment of the Hon’ble Supreme Court in TRANSCORE V. Union of India and another 2008(1) SCC 125 to submit that in such a situation, doctrine of election will not be applicable.

8. Thus, question which is required to be gone into is whether the Corporation is debarred form proceeding under Section 29 of the SFC Act, after having involved Arbitration clause or on account of remedies under the Companies Act.

9. We are not going into the question of justification or otherwise of the quantum of amount claimed in the impugned orders. Such a question can be gone into at appropriate forum as and when put into issue by either of the parties.

10. We find that the scope of arbitral Tribunal is confined to the claim of Rs.1.92 crore with interest advanced towards equity and does not cover the amount claimed in the impugned notice. Statutory power under Section 29 of the SFC Act being a special provision could certainly be involved unless there was any legal bar to such a course. C.W.P. No.3357 of 2008 7 We are unable to hold that doctrine of election will be a bar in the present fact situation. It is not a case where simultaneously any other remedy has been involved for the amount covered by notice under Section 29 of the Act. Arbitration proceedings do not cover the said amount. Case of the respondent is that amount involved in impugned notice is not towards equity. There is nothing to substantiate the contention raised on behalf of the petitioner that the loan was in fact equity. In any case, such a disputed question cannot be adjudicated in writ proceedings. Learned counsel for the respondent has made a statement that the Corporation is not simultaneously resorting to and will not resort to any other remedy simultaneously, for the purpose for which remedy under Section 29 of the SFC Act has been invoked.

11. We, thus, do not find any bar to the respondent Corporation invoking Section 29 of the SFC Act.

12. Accordingly, the writ petition is dismissed, without prejudice to any other remedy of the petitioners in accordance with law. ( ADARSH KUMAR GOEL ) JUDGE November 19, 2008 ashwani ( L. N. MITTAL ) JUDGE