HIGH COURT OF KARNATAKA
Kanoria Industries Ltd
v.
State of
N.K. SODHI, CJ.
AND K.L. MANJUNATH, J.
WRIT APPEAL NO. 2064 OF
2004
May 25, 2005
Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985 - Suspension of legal proceedings, contracts, etc. - Whether what is prohibited by section 22(1) is a positive act on part of a creditor including Government, to whom money is due, from initiating action to recover amount; it does not oblige creditor including Government to take any step that may facilitate sick industrial company to carry on its business - Held, yes - Appellant-company, engaged in cement manufacturing business, was declared sick unit by BIFR - While scheme for its revival was under preparation, State Government levied extra tax on cement - Appellant approached prescribed authority to issue Form 40 to enable it to issue same to its respective dealers thereby enabling them to claim exemption from said tax - Said authority, however, directed appellant to first clear dues towards said tax - On writ, appellant contended that impugned action was a coercive action prohibited under section 22 - Whether non-issue of declaration forms on account of non-payment of arrears of tax may be a pressure on sick company to clear its tax arrears, but it could not amount to initiation of coercive proceedings for recovery of amount and, therefore, would not come within scope of section 22 - Held, yes - Whether therefore, writ petition was liable to be dismissed - Held, yes
The appellant-company, engaged in the
cement manufacturing business, suffered heavy losses due to which its
accumulated losses exceeded its net worth. On reference, the BIFR declared it a
sick unit and appointed an operating agency to formulate a scheme for its revival.
While the scheme was under preparation, the respondent-State decided to levy
extra tax on cement under the provisions of the Karnataka Tax on Entry of Goods
Act, 1979. In pursuance thereof, the appellant approached the prescribed
authority (fourth respondent) for issuance of books containing Form No. 40 to
enable it to issue the same to its respective dealers thereby enabling them to
claim exemption from said tax. The fourth respondent, however, not only refused
to issue the same, but also directed the appellant to first clear the dues
towards the said tax. On writ petition, the appellant, while contending, inter
alia, that the impugned action was a coercive method prohibited by section
22, prayed for the issue of a mandamus to the fourth respondent accordingly.
The Single Judge of the High Court, however, dismissed the said petition.
On appeal to the Division Bench:
What is prohibited by section 22(1) is that no creditor of a sick industrial company including a
Government, tO which monies may be due, shall be allowed to initiate any
proceedings either for the winding up of that company or for
executions-distress or the like against any
of the properties of the company to recover its dues except with the permission of the BIFR. The purpose is to
preserve the properties of the
company so long as proceedings of the kind referred to in section 22(1) are pending. This provision, does not make it obligatory for the creditors
including the Government to take all
or any steps to enable the sick industrial company to carry on its business in a more meaningful manner. In the
instant case, the fourth respondent
had not initiated any proceedings against the appellant to recover the entry tax dues, he had only refused to
issue the statutory declarations in
Form No. 40 which, if issued, would enable the appellant to give them to the dealers to whom cement was sold so
that they could in turn claim
exemption under section 3 of the State Act. The effect of non-issue of the statutory forms would be that the
appellant would not be able to furnish those forms to the dealers, who
purchased cement from it and those dealers
would not be entitled to claim exemption under section 3 and, therefore, they might make their purchases from other
sources from where they could get those
forms and in that way the appellant might lose its business. Issue of those
forms might only enable the appellant to retain its customers. Section
22(1) prohibits a positive action on the part of a creditor including the Government to whom money is due from
initiating action to recover the
amount. By refusing to issue Form No. 40, it could not be said that the fourth respondent had initiated proceedings
against the appellant ‘for execution,
distress or the like against any of the properties of the industrial company’ to recover the tax dues. That may only be
a pressure on the company to pay the
tax due but surely section 22(1) did not
mandate the said respondent to issue those forms. The issue of those forms would only enable the
company to have better business
prospects by retaining its customers which is not within the scope of section 22. What is prohibited by
section 22(1) is a positive act on
the part of a creditor including the Government to whom money is due from initiating action to recover the amount It
does not oblige the creditor including the Government to take any step that may facilitate the sick industrial
company to carry on its business. In
that view of the matter, no fault could be found with the order of the Single Judge refusing to give a direction to the
fourth respondent to issue the
statutory declarations in Form No. 40. [
In the result, the writ appeal failed and the
same stood dismissed. [