A company may be ordered to be wound up if it is unable to make its net worth exceed its accumulated losses within a reasonable time while meeting all its financial obligations and as a result thereof is not likely to become viable in the future.

JUDGMENT :

M.S. Shah, J.

1. This petition arises from the opinion-dated April 28, 1995 of the Board for Industrial and Financial Reconstruction (hereinafter referred to as "the BIFR") in Case No. 290 of 1987 (new Case No. 21 of 1995), recommending to this court under section 20 of the Sick Industrial Companies (Special Provisions) Act, 1985 (hereinafter referred to as "the SICA Act") for winding up of M/s. Raj Prakash Spg. Mills Ltd. (hereinafter referred to as "the company") as confirmed by the Appellate Authority for Industrial and Financial Reconstruction (hereinafter referred to as "the AAIFR" or "the appellate authority") on September 16, 1996, in Appeal No. 84 of 1995.

2. First phase of proceedings before the BIFR :

3. At the instance of the management of the company as well as at the instance of the Bank of Baroda, the company's case was referred to the BIFR. The company was declared to be a sick industrial company on September 22, 1988. The following reasons were noticed by the BIFR for the company's sickness (page 256 of the paper book) :

(i) Lack of modernisation with no substantial addition to machinery/equipment, in the last ten years;

(ii) Obsolete machinery resulting in poor efficiency which eroded competitive ability both in quality and price;

(iii) Recessionary conditions in the textile industry;

(iv) Liquidity crunch resulting from continuous cash losses and rising input costs; and

(v) Inadequate/ineffective management provided by the promoters.

4. The BIFR also noted that the working of the company started deteriorating from 1975 onwards and that as on March 31, 1992, the net worth was negative to the extent of Rs.260 lakhs with accumulated losses of Rs.237 lakhs against share capital of Rs.45 lakhs and reserves of Rs.21 lakhs and the losses had thus wiped out the share capital by almost seven times. The BIFR also noted that the Bank of Baroda had instituted a suit against the company for recovery of its dues.

5. The BIFR appointed the Industrial Reconstruction Bank of India (IRBI), which is now the Industrial Investment Bank of India (IIBI) as the operating agency which prepared a draft scheme for rehabilitation of the company after considering the responses of the various parties including the management of the company, the Bank of Baroda, which is the only secured creditor and the workers' union, the State Government, the Regional Provident Fund Commissioner and the Employees' State Insurance Corporation. With the consent of all the aforesaid parties, the BIFR sanctioned the scheme on October 14, 1993.

6. The main features of the rehabilitation scheme were as under :

7. The scheme envisaged capital expenditure for acquisition of five numbers high production card conversion and two numbers open end machines with 160 rotors at a cost of Rs.65 lakhs, including contingency and an assumption that no cash credit facility would be availed of from Bank of Baroda.

8. Under the scheme, the bank and the company were to obtain a consent decree on the basis of the consent to be signed by all the defendants including the guarantors except guarantor Mr. R. V. Patel. The company was to repay the bank dues computed as under :-

(i) Interest on suit amount of Rs.203 lakhs shall be charged at 10 per cent. per annum on simple basis from the date of filing suit till date of consent decree.

(ii) The amount so arrived at (approx. Rs.304 lakhs) shall carry interest at 12 per cent. per annum with quarterly rests