The court emphasizes the need to prevent the abuse of the Sick Industrial Companies (Special Provisions) Act, 1985, particularly Section 22, and directs the BIFR to issue practice directions to address this issue.

A.K. SIKRI, ACJ.

1. The petitioner feels aggrieved by the action of the respondent Usha India Limited in making repeated references before the BIFR and appeals therefrom before the AAIFR, even when previous references made by the petitioner were rejected. The grievances of the petitioner is that it amounts to continuous and systematic abuse of process resorted to by Usha India limited with the sole motive of delaying and defeating the rights of its creditors. Usha has been filing repeated references before the BIFR and getting for itself protection of the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985 which it is otherwise not entitled to. To highlight the purported mala fides and abuse on the part of the Usha, the petitioner traced the following events in its petition.

2. On 30.7.2002 Usha filed its first Reference before BIFR which was registered as Reference no. 117/2002, claiming losses of ` 1015.24 Crores. In just three months, the said Reference was rejected. The BIFR, vide a detailed order recorded that far from losses, the net worth of Usha is positive by ` 800.73 Crores. The following findings of the BIFR’s order dated 28.10.2002 are relevant:

“…The Company made investments of ` 504 crores in these companies during 19962000. The profit of the company during this period was ` 66.25 cores. The company disinvested in many of the sister concern companies. These were both quoted and unquoted investments. The company has not disclosed to whom these investments were sold and as to how the funds were realized.”

“…AS explained above, funds aggregating ` 504 crores were made in preference shares, 0% FCDs and these investments were not entirely made out of the profits of the company. The system adopted by the Company about valuation of unquoted investments was neither transparent nor consistent. The investments cannot be considered having completely eroded, especially when UIL was the promoter of these companies and the investments were made as promoter’s contribution to draw long term benefits…. The contention of the company that it had raised cash by dis-investing in sister concerns during 1997-98 to 1999-2000 is also not supported with any evidence as to how and to whom these investments were sold. The company has been manipulating its investment portfolio…”

“…The net worth of the company would become positive by ` 800.73 crores after disallowing the losses to the extent of ` 1015.24 crores as discussed”.

3. On 12.03.2003, Usha filed an appeal against the aforesaid order dated 28.10.2002 before the AAIFR. On 4.8.2006 i.e. after about three and half years, the above appeal (appeal against the first reference rejection) was finally disposed off by the AAIFR, which affirmed that there has been manipulation of accounts by Usha in order to establish sickness. Some portions of the AAIFR order which may be noted are:-

“….No doubt a company is not barred from making investments outside. However, such huge investments outside, all of which has turned bad, at the cost of running the appellant company itself cannot be considered as an example of bona fide wrong intention. This company had net worth nearly 833 crores but as early as 30.6.1996 it had invested ` 1554 crores outside itself; such huge investments outside the company cannot be considered as bonafide mistakes. No company can be absolved of the action of investing outside consciously, at the detriment of the parent company, and therefore claim sickness.”

4. The findings of the BIFR as affirmed by the AAIFR on 4.8.2006 were not challenged by Usha. Therefore, the same became final and binding. Yet, Usha continues to illegally carry forward these disallowed losses in subsequent references which act according to the petitioner is a complete abuse of legal process and claiming protection for years on a reference based on such losses is patently illegal, and designed solely to deny creditors the window for execution.

5. While the appeal