Delhi High Court (April 24, 2002) 2002 (TLS)127453 2002-DLT-100-602 :: 2002-ILRDLH-10-232 SERENE INDUSTRIES LIMITED Vs. APPELLATE AUTHORITY FOR INDUSTRIAL AND FINANCIAL RECONSTRUCTION MUKUL MUDGAL ( 1 ) THIS writ petition under Article 226 and 227 of the constitution of India prays for setting aside the impugned orders dated 20th of December, 1999, 6th and 13th June, 2000, passed by respondent No. 1 and respondent No. 2 respectively. M/s Serene Industries Ltd. is the petitioner No. 1 (hereinafter REFERRED TO as "the Company"); mr. Rajesh Sarvaiya is the petitioner No. 2; Appellate authority for Industrial and Financial Reconstruction is respondent No. 1 (hereinafter REFERRED TO as "the AAIFR"); board of Industrial and Financial Reconstruction (hereinafter referred to as "the BIFR"); Development Commissioner, industries is respondent No. 3; Chairman and MD, State Bank of India, is respondent No. 4 (hereinafter referred to as "the SBI"); Chairman and MD, Dena Bank is respondent no. 5 (hereinafter REFERRED TO as the Dena Bank"); Chairman and MD, Oriental Bank is respondent No. 6 (hereinafter referred to as "the Oriental Bank ); Chairman and MD, Bank of India is respondent No. 7;. . Chairman and MD, IDBI is respondent no. 8; Chairman and MD, IIBI is respondent No. 9; Chairman and md, ICCI is respondent No. 10; Chairman and MD, IFCI is respondent No. 11; Chairman, GIIC is respondent No. 12; chairman and MD, SICOM is respondent No. 13; Manager, Vysya bank Ltd. is respondent No. 14; Director General, ESIC is respondent No. 15; Central Provident Fund Commissioner is respondent No. 16; President, Bhartiya Kamgar Sena is respondent No. 17 and President, Gujarat Rajya Kamgar Sabha is respondent No. 18. Respondents 3 to 14 are the financial institutions and banks, who are the petitioners creditors, respondents 15 to 16 are statutory creditors of the Company and respondents 17 to 18 are the workers union of the company. The petitioners were permitted to file an amended writ petition by this Court s Order dated 25th July, 2000 in view of the passing of a reasoned Order dated 13th June, 2000 by AAIFR by which they sought to challenge the impugned said Order dated 13th June, 2000 apart from challenging the impugned Orders dated 20th December, 1999 and 6th June, 2000. ( 2 ) THE brief facts averred by the petitioners are as under: (I) On 24th of July, 1970, the Company was incorporated under the Companies Act, 1956 as J. N. Kanth Chemicals and Dye stuff Ltd. , entering into the business of manufacturing and selling dye stuff and intermediaries. (II) On 16th of August, 1988 the Company commenced its commercial production of dye stuff at its factory at LOTE. However, due to sluggish market conditions, adverse and unsustainable competition from overseas suppliers, working capital constraints and excise duty structure stunted the profitability of the Company and it sustained severe losses, making the petitioner Company sick within the meaning of Section 3 (1) (o) and other provisions of Sick industrial Companies (Special provisions) Act, 1985 (hereinafter referred. to as the SICA ). Since the net worth of the Company had been totally eroded the petitioner deserved registration under SICA in public interest. (III) In October, 1998 the Company approached the BIFR by filing a reference under section 15 (1) of SICA and after considering the various aspects, the bifr reserved its order and had also given certain directions to the parties and had appointed the ICICI to find out as to whether the Company had become a sick Company under the SICA. However, the petitioners contention is that the bifr was not justified in choosing ICICI as the institution for preparing the report since an objective view could not be expected from such a large creditor. In sum and substance the petitioners plea is that the BIFR should have appointed an Operating Agency under Section 16 (2) of SICA to find out the sickness of the company. Moreover a copy of the Report was to be made available to the Company under confirmation to the Board for the company s comments. However, ICICI after having a joint meeting with all the secured creditors did not provide the Company with a copy of the Report and therefore, the Company could not comment on the Report in the hearing, fixed before the BIFR on 9th of september, 1999. However, ICICI after having a joint meeting with all the secured creditors did not provide the Company with a copy of the Report and therefore, the Company could not comment on the Report in the hearing, fixed before the BIFR on 9th of september, 1999. (IV) On 14th of September, 1999 a copy of the report was made available to the Company wherein baseless allegations were levelled by the ICICI that the accounts of the Company were manipulated because in the Joint Meeting of its creditors it had been decided that an independent chartered accountant shall be appointed by the ICICI to scrutinize company s accounts which was not done and ICICI went on to make its own Report without complying with its commitment before the joint Meeting. The Company was not called for the said Joint Meeting to present its case before the Consortium. (V) On 22nd of September, 1999, the Company filed its replies to the Report and observations made by the ICICI before the BIFR. On 12th of November, 1999, the ICICI filed their sur-rejoinder, containing new facts and pleas before the BIFR. The Company was not given an opportunity to file any reply to the sur-rejoinder. (VI) On 20th of December, 1999 the BIFR dismissed the petitioners reference in total disregard of the principles of natural justice. Accordingly the company challenged before the a. A. I. F. R. , the Appellate Authority under Section 25 of SICA, the impugned order dated 20. 12. 1999, passed by the bifr on the following grounds: (A) it was passed without holding a hearing; (B) it was passed without getting the opinion of an independent chartered Accountant; (C) it was passed without holding an enquiry in terms of Section 16 (2) of the Act; (D) it was passed without considering the contention of the petitioner Company that losses sustained in the subsequent years have also to be taken into account as per the judgement of AAIFR in the matter of Shrishma Fine; (E) It was passed in violation of regulations 21 and 40 of BIFR regulations 1987 and contrary to the judgement of Supreme court in Real Value Appliances ltd. vs Canara Bank (1998) 5 scc 554 ; (F) It was passed without considering the contention of the petitioner that the company was sick even on 31. 12. vs Canara Bank (1998) 5 scc 554 ; (F) It was passed without considering the contention of the petitioner that the company was sick even on 31. 12. 97 and (G) It was passed without hearing the promoters who were accused of siphoning of funds in violation of principles of natural justice. (H) That the BIFR had not taken the larger perspective and public interest into consideration before passing an order dismissing the reference. ( 3 ) AGGRIEVED by the Order of BIFR, the Company filed an appeal in January, 2000 before the AAIFR against the Order dated 20. 12. 1999. On 6th of June, 2000, the AAIFR, consisting of the Chairman and another member who were both from the non-judicial side, dismissed the petitioners appeal by observing that the detailed order shall follow and on the basis that the accounts of the Company were not in order, without addressing the real question whether the company was sick or not. The petitioner Company submitted that the direction by the AAIFR that the subsequent accounts shall not be considered is absolutely against the provisions of SICA and amounts to a permanent injunction against the Company under the Act. ( 4 ) THE petitioners submitted that they are adversely affected by this Order of the AAIFR as it cannot challenge the said order substantlvely since findings have not been recorded by AAIFR. It further submits that in view of the judgement of Supreme Court in L. K. Ratha vs. ICAI AIR 1987 SC 71 , the Appellate Court cannot enter into the merits of the case since it amounts to forfeiture of the appellant s right of appeal. In that sense also the aaifr s order was totally erroneous. ( 5 ) THE petitioner s contention is that by giving a short order which was followed by a detailed Order of the AAIFR dated 13. 6. 2000 later, the petitioner No. 1-Company was placed in a disadvantageous position viz-a-viz respondents who were placed in an advantageous position to initiate action including takeover of the undertaking of the petitioner under Section 29 of the SICA by SICOM for want of protection under Section 22 (1) of SICA and the AAIFR also ignored the fact that in the last two years, the not worth of the Company had further eroded and therefore the company was definitely a sick company. Accordingly the petitioner Company prayed for setting aside the impugned orders dated 20. 12. 1999, passed by the BIFR and 6. 6. 2000 and 13. 6. 2000, passed by the AAIFR. ( 6 ) BY the impugned Order dated 20th December, 1999, the bifr while rejecting the petitioner Company s reference under Section 15 (1) of SICA found as follows: (A) that the company/promoters had no regard to the directions issued by the Board and did not appear to be serious in the revival of the Company. (B) that there was no justifiable or convincing reason for changing the. accounting year as in the Director s report dated 24th September, 1998. no reason was given for reducing the accounting period from the previous accounts period of 18 months upto a mere 6 months. (C) that the Company s plea that the accepted depreciation was provided for due to the changed accounting policy and consequently the Company made the provision for arrears for depreciation while finalizing the accounts for the year ended 30. 6. 1998 in order to reflect the true and fair view of the state of affairs of the Company was rejected by the BIFR as there was no reason given to change the accounting policy except to suggest that this was done to reflect the true and fair state of affairs of the Company. (D) that in the matter of depreciation and accounting policy, an opinion from the statutory Auditors were not taken and a legal opinion was resorted to. Consequently it was found that the promoters had been manipulating the accounts of the company from year to year and the accounting year was changed to suit the promoters s objective for that year. (E) that while closing the financial year 1996-97 interest of Rs. 1975. 11 lacs on term loans from financial institutions was capitalized in the accounts of the year 1996-97 apparently on the basis of the legal opinion. However, while finalizing the accounts for 30. 6. 98 the company decided to again write off this amount by debiting it to the profit and loss accounts on the plea t. hat it was now noticed that the legal opinion was not as per the guidelines issued by the institute of Chartered Accountants of india and accordingly the Company debited the full amount of Rs. 1176. 11 lacs to profit and loss account. 1176. 11 lacs to profit and loss account. This also conclusively shows that the promoters have manipulated the accounts of the Company from year to year to mislead the secured lenders, unsecured creditors, public shareholders and the public at large particularly when the opinion of M/s Bharat Shroff and Company, who were the statutory auditors, was not given heed to but the course of adopting the so called legal opinion was adopted. (F) that in respect of preliminary expenses of Rs. 46. 43 lacs, the company has failed to give a proper explanation for changing the adopted accounting policy while finalizing the balance sheet for the period ended 30. 6. 1998 and what was consistent in the accounting policy over the years was only a total lack of consistency in the accounting policy merely for manipulating the accounts. (G) that while finalizing the accounts for the period ended 30. 6. 1998 the company converted the plot of land costing rs. 577 lacs in Kalina, Mumbai from fixed assets into stock in trade at the market value of Rs. 1327 lacs on 18. 10. 1997 and rs. 759 lacs which was the difference between the cost of assets in the market which was taken to the profit and loss account as revenue income. This was done without giving any explanation in the Annual Report for 1996-97. However, while finalizing the accounts for the period ended 30. 6. 1998, the company reversed the entry and transferred the revenue income of Rs. 750 lacs on the ground that the revenue was wrongly treated instead of capital reserve leading to the conclusion that this was a unique manipulation of final accounts solely with the intention of avoiding legal and financial liabilities by seeking to take protection under SICA and no justification was shown for overstating losses in 1997-98. In respect of a prior period adjustment of rs. 3579. 29 lacs also, the Board came to a conclusion that the details submitted by the Company in respect of sundry debts written off is a classic example of the worst form of manipulation of accounts by any company. The company was in the habit of taking credit for the income of a fictitious nature for huge amounts and later on reversing them as unrealizable. The company s loans to group companies engaged in the business of finance have not been explained properly. The company was in the habit of taking credit for the income of a fictitious nature for huge amounts and later on reversing them as unrealizable. The company s loans to group companies engaged in the business of finance have not been explained properly. The ICICI"s submission that promoters have siphoned away funds to group companies by issuing debt receivable and later on writing off the same as doubtful debts is correct. The company has been manipulating its accounts for several years including the period ended 30. 6. 1998 and also indulged in booking fictitious income. (H) that there was no explanation for the disproportionate increase in the cost of items even though the company could not run the plant on a continuous basis. (I) that no proper records of the fixed assets was maintained. (J) that in respect of an advance of Rs. 2. 25 crores given to M/s Tvistex India Pvt. Ltd. towards purchase of the office premises in New Bombay, the amount was forfeited for non-payment of the balance amount within the stipulated time and this sum of Rs. 2. 25 crores was written off in the profit and loss account during the period ended 30. 6. 1998. The transaction was based in the form of a letter dated 27. 3. 1995 which states that if possession is not taken on or before 13. 9. 1995 by paying the balance amount, the Company shall not have any right, title or interest in come property but advance shall be returned without any interest. The fact that the return of advance without an interest was not sought to be enforced clearly leads to a conclusion that the documents are fabricated. ( 7 ) THAT in the light of the above findings, the Board came to the conclusion that the company and its promoters had indulged in serious and objectionable manipulations of accounts not only for the period ended 30. 6. 1998 but also for the accounts of the earlier years and that the promoters had not come to the Board with clean hands and, therefore, it was not possible to establish the eligibility of the company as sick under Section 3 (1) of SICA and the reference under Section 15 (1) of SICA was dismissed as not maintainable. 6. 1998 but also for the accounts of the earlier years and that the promoters had not come to the Board with clean hands and, therefore, it was not possible to establish the eligibility of the company as sick under Section 3 (1) of SICA and the reference under Section 15 (1) of SICA was dismissed as not maintainable. The Board also directed the financial institutions to take up the matter with the appropriate authority for the systematic manipulation of accounts and diversion of large sums of money by the promoters of the company. ( 8 ) THIS led to the dismissal of the reference by the impugned Order dated 20th December, 1999 by the BIFR. By the impugned Order dated 13. 6. 2000, the Appellate authority, i. e. , AAIFR dismissed the appeal against the said Order of the BIFR dated 20. 12. 1999, leading to the present writ petition. The Appellate Authority recorded the following findings,". (A) that there was no violation of natural- justice qua SIL, ie. y the Company or violation of Regulations 21 and 40 of BIFR regulations 1987, (13) the provision of Rs-3579-29 lacs as "prior Period Adjustments" is not acceptable bee a use: 1. the expenses of Rs. 690. 71 lacs as Prior Period Adjustments is not a a result of omission or error in the preparation of financial statements of prior periods and charges of these expenses to the profit and loss account for FY-98 (by reversing earlier entries as capital work in progress) as "prior period adjustments" is an accounting manipulation contrary to the stipulations of AS-S- 2. Finance charges of Rs. 1120,. 82 lacs as prior period adjustments i:s also not a case of any error or omission in the financial statements for FY-97 as it is not the case of the SIL that the expenditure of Rs. 1120,. 82 1acs have been actually incurred during FY-98 by way of payment of overdue interest to the financial institutions/banks. Consequently provision of rs. 1120. 82 lacs (finance charges) as "prior period adjustments" in FY-98 is an accounting manipulation and not consistent with the stipulations of AS--5. 3. Rs. 1767-76 lacs which were sundry debts written off a prior period adjustments was a clear case of malfeasance. Consequently provision of rs. 1120. 82 lacs (finance charges) as "prior period adjustments" in FY-98 is an accounting manipulation and not consistent with the stipulations of AS--5. 3. Rs. 1767-76 lacs which were sundry debts written off a prior period adjustments was a clear case of malfeasance. The promoter Directors of the company have caused loss to the company by siphoning away company s funds to their private limited group companies and then writing these off. The promoter directors should not have participated in the Board of director s Meeting for approving the accounts for FY-98 in which receivables from their private limited group companies were proposed to be written off. Furthermore the remaining write-offs of sundry debtors of rs. 1250. 26 lacs declared as good/recoverable on 14. 4. 1998, were certified by the Board of directors of the Company as per resolution dated 14. 8. 1998, approving the FY-97 accounts, but written off thereafter within the period of six weeks, without any effort of recovery, clearly constituting acts of malfeasance/non-feasance. 4. Thus the conclusion is that some recovery debts have been transferred during FY-98 to such companies, firms or other parties referred to under section 301 and 370 (1-B) of the companies Act, 1956, and then written off, amounting to the acts of malfeasance/misfeasance. (C) The provision of prior period adjustments, contrary to the stipulations of AS-5 is a clear case of diversion of working capital funds, obtained from banks to meet the financial needs of third parties (including inter alia the private limited group investment companies of the promoters of SIL) and siphoning away of funds. Consequently the provision of Rs. 3579. 29 lacs as "prior period adjustments" in FY-98 accounts is contrary to the stipulations of AS-5 and a large part of it is a clear case of diversion and siphoning away of funds by indulging in acts of malfeasance/misfeasance/non-feasance by the promoter Directors of SIL. Consequently for the purpose of considering the accumulated losses of the company, the provision of Rs. 3579. 29 lacs as "prior period adjustments" is liable to be ignored. (D) The company s plea that the provision of rs. 3744. 85 lacs as "extra-ordinary items" in FY-98 accounts is unacceptable for the following reasons: 1. The reversal of certain entries for the provision of Rs. 3744. 3579. 29 lacs as "prior period adjustments" is liable to be ignored. (D) The company s plea that the provision of rs. 3744. 85 lacs as "extra-ordinary items" in FY-98 accounts is unacceptable for the following reasons: 1. The reversal of certain entries for the provision of Rs. 3744. 85 lacs as extra-ordinary items was not done in order to comply with the accounting standards issued by ICAI and none of these items falls within the definition of "extra-ordinary items" under as-5. 2. All these entries are accounting manipulations and contrary to the accounting standards issued by the ICAI for the sole purpose of booking losses in FY 98. 3. For the purpose of considering the the accumulated loss of appellant company, the provision of Rs. 3744. 85 lacs as extra- ordinary items is to be ignored. Furthermore the lose of Rs. 225 lacs by allowing forfeiture of this amount by tipl is without any justification and is an act of misfeasance because the amount could have been recovered by SIL from TIPF in accordance with the terms of the contract. 4. Consequently from the foregoing discussion, it is clear that the provision of Rs. 3579. 29 lacs for prior period adjustments and 3744. 85 for extra-ordinary items, aggregating Rs. 7324. 14 lacs in FY 98 profit and loss account is contrary to the accounting standards and losses in FY 98 are, therefore overstated to that extent and this figure of Rs. 7324. 14 lacs is to be ignored in computing the accumulated losses of the company at the end of FY 98. (E) Furthermore the following also show that the losses in FY 98 have further been over-stated through several other accounting manipulations detailed as under:- (A) even the Company s own statutory auditors observed that the preliminary expenses of Rs. 44. 99 lacs cannot be accepted. (B) the figure of Rs. 1976. 11 lacs as interest on term loans from financial institutions and consequently treated as capital work in progress in FY 97 and was correctly capitalised and the reversal of this entry from "fixed assets" is contrary to as-10. The loss has been over-stated by Rs. 1976. 11 lacs. (C) that the funds obtained through banks have been diverted to third parties whereas finance charges on such funds are debited to the Company s account. The loss has been over-stated by Rs. 1976. 11 lacs. (C) that the funds obtained through banks have been diverted to third parties whereas finance charges on such funds are debited to the Company s account. Thus the waiver of recoverable interest is a clear case of mal-feasance/mis- feasance. (D) that the non-accounting by the company on account of fluctuations in foreign exchange rates amounting to Rs. 5. 94 lacs also contravenes AS-II of ICAI. Consequently if the over-stated losses in FY 98 accounts are ignored in respect of the company, the net worth of the company as 30th June, 1998 far exceeded its accumulated losses. (E) That while the Board of directors of the Company was approving FY 97 accounts showing a positive net-worth of Rs. 47 crores and accumulated losses as nil, at the same time it was planning to recast its accounts so as to erode the entire net-worth during the period of 6 weeks and the BIFR s conclusion that the Company had no justifiable or convincing reason for changing the accounting year deserves to be affirmed as it is obvious that the change of the accounting year was with the sole purpose of recasting the accounts so as to erode the net-worth and go to BIFR. ( 9 ) CONSEQUENTLY the Board hold as follows: "in the present case, however, the facts clearly lead to the conclusion that the promoter directors have resorted to dishonest and unfair practices. They have diverted substantial sums of money, borrowed from banks for SIL s business, to their private limited investment companies and then written off. They have also advanced substantial funds to third parties and waived the interest without oven fixing any time limit for repayment of the principal amount. They have deliberately allowed forfeiture of money advanced for purchase of some office premises though the money was recoverable under the terms of the contract. We agree with the counsel for the ICICI that SICA is not meant to provide protection to dis-honest promoters who divert and siphon away funds. SICA is meant for industrial companies with bonafide sickness. The protective umbrella u/s 22 (1) of SICA is not meant for companies/promoters going to BIFR after diverting and siphoning away funds by resorting to dishonest and unfair practices. SICA is meant for industrial companies with bonafide sickness. The protective umbrella u/s 22 (1) of SICA is not meant for companies/promoters going to BIFR after diverting and siphoning away funds by resorting to dishonest and unfair practices. " ( 10 ) THE Board further affirmed the following finding of the BIFR: "the Board comes to the conclusion that M/s. Serene Industries Ltd. (SIL) and its promoters have indulged in very many highly serious and objectionable manipulations of accounts not only in the balance sheet for the period ended 30. 6. 98 but also in the accounts of its earlier years. The company s explanations regarding the various objections have only gone to establish the serious manipulations of accounts over many years with a view to deliberately mislead and defraud the company s creditors - secured and unsecured, public shareholders. The board, therefore, comes to the firm conclusion that the company s accounts are totally unreliable and the promoters have come to the Board with unclean hands; and as such it would not be possible to establish the eligibility of the company as sick under Section 3 (1) (o) of SICA. The board also firmly believes that such unscrupulous promoters who approach the board with unclean, nay, dirty hands deserve not protection under SICA. The board, therefore, dismisses the company s reference under Sec. 15 (1) of sica as non-maintainable. "the aforesaid orders of the AAIFR dated 6. 6. 2000 and 13. 6. 2000 are the subject-matter of challenge in this writ petition. ( 11 ) THE learned counsel for the petitioner has assailed the findings, of AAIFR on several grounds. However, since this is a writ petition under Article 226 against the appellate order of a quasi judicial authority, the Writ court cannot sit as a second appellate Court and determine disputed questions of fact. Consequently, I am only considering the legal issues involved which arise in this petition. The legal issues, therefore, have to be determined in the light of the findings of fact recorded by the AAIFR and the BIFR. ( 12 ) THE conclusion of the AAIFR that the provision of rs. 3579. 29 lacs for prior period adjustments and Rs. 3744. 85 for extra-ordinary items, aggregating Rs. 7324. The legal issues, therefore, have to be determined in the light of the findings of fact recorded by the AAIFR and the BIFR. ( 12 ) THE conclusion of the AAIFR that the provision of rs. 3579. 29 lacs for prior period adjustments and Rs. 3744. 85 for extra-ordinary items, aggregating Rs. 7324. 14 lacs in FY 98 profit and loss account, is contrary to the accounting standards and the losses in FY 98 overstated to that extent and thus the figure of Rs. 7324. 14 lacs is to be ignored in computing the accumulated losses of the company at the end of FY 98, is not such a finding which is perverse, illogical or based on no evidence. Accordingly, it is not a finding that can be interfered by this Court under article 226 of the Constitution as held in the Indian overseas Bank vs. I. O. B. Staff Canteen Workers Union and another (2000) 4 SCC 245 where it was held that a writ court does not exercise appellate jurisdiction over a tribunal. Furthermore the petitioners have felt aggrieved by what is termed as "denial of an opportunity to file reply to the sur-rejoinder of the respondent No. 10 dated 10. 11. 1999. " The AAIFR has observed that the process of. replies and rejoinders cannot go on ad infinitum. The aaifr is perfectly justified in corning to such a conclusion particularly in the absence of any opportunity sought by way of an application by the petitioners to file a reply to the sur-rejoinder. ( 13 ) THE other plea raised by the petitioners before this court is that the non-appointment of an independent; hartered Accountant amounted to breach of natural justice. Regulation 21 of the BIFR Regulations, 1987 which has been relied upon by the petitioners in support of this plea reads as under: "21. Upon a reference with respect to an industrial company under section 15 or upon information received with respect to such company, or upon its own Knowledge as to the financial condition of the company, the board may- (A) itself make such inquiry, as it may deem fit, for determining whether the industrial company has become a sick industrial company; or (B) if it deems necessary or expedient so to do, for the expeditious disposal of inquiry mentioned at (a) above, direct by an order, an operating agency, to be specified in the. order, to enquire into and make a report with respect to such matters as may be specified in the order: PROVIDED that, reasonable opportunity for making submissions shall, be given by the informant, before deciding whether the said company has become a sick industrial company or not. " THE counsel has been unable to show how the above provision is violated or the prayer for appointment of an independent auditor flows from the above provision. The fact that serious anomolies were pointed out by the company s own auditors in any event militates against this plea of the company for seeking appointment of an in dependent auditor, particularly when no sustainable flaw has been pointed out about the defects in accounting procedure concurrently found by the BIFR and AAIFR. ( 14 ) THE learned counsel for the petitioners has further contended that there was breach of Regulation 40 of the b:ifr Regulations 1987 which reads as under: "assistance to the Board. The Board may, at any time, take the assistance of public financial institutions, banks or other institutions, banks or other institutions, consultants, experts, chartered accountants, surveyors and such other technical and professional persons as it may consider necessary and ask them to submit report or furnish any information. PROVIDED that if the report or information so obtained or any part thereof is brought on record of any inquiry and is proposed to be relied upon by the Board for forming its opinion or view, the party or parties to the inquiry shall be given a reasonable opportunity of making his or their submissions with respect thereo. "the above regulation clearly uses the phrase may and the learned counsel for the petitioners while seeking the appointment of an independent auditor contended that the word "may" must be read as "shall" but has not given any cogent reason for doing so except citing the facts and circumstances of the present case and the bias of ICICI for which no cause except ICICI being a major creditor (Rs. 22. 2 crores) of the company is cited. The petitioners counsel has not given any cogent reason why the ICICI was biased against it except to suggest that it was one of the major. creditors, of the company. The petitioners have not made out any other ground to substantiate the allegation of bias against the ICICI. 22. 2 crores) of the company is cited. The petitioners counsel has not given any cogent reason why the ICICI was biased against it except to suggest that it was one of the major. creditors, of the company. The petitioners have not made out any other ground to substantiate the allegation of bias against the ICICI. Furthermore, I see nothing wrong if the icici resisted the attempts of the petitioner Company to seek the protective umbrella of the Act on specious pleas. A mere decision of creditors on 7. 4. 1999 is not a sufficient cause for appointment of an independent chartered Accountant. In any case there could have been no more independent auditor than the Company s own Chartered accountant who had adversely commented on the company s accounting procedures. The plea of breach of violations of the principles of natural justice on the ground that findings were recorded against the promoters of the company without affording them an opportunity of being heard is in my view totally devoid of substance because the company was before the BIFR and was being heard under instruction from those in control of company. It is not the company s case that some one other than the indicted promoters were in charge. Consequently this plea, is indeed a plea of desperation and has no merits and is thus rejected. In this connection the reliance on Regulation 21 already extracted above is misplaced as the said regulation permits even the BIFR to hold an enquiry and Regulation 21 thus cannot come to the aid of the petitioners. ( 15 ) THE other plea of the petitioners that natural justice was violated and the plea of siphoning of the funds of the company was raised only in the sur-rejoinder cannot be accepted because the ICICI s counsel has rightly pointed out that these objections were communicated to the petitioner company by letter dated 14th September, 1999 and have merely been restressed with reference to the company s rejoinder and thus contained an analysis of the balance sheet of the company. In paragraph 6 of the order, plea of natural justice violation has been rightly rejected by the aaifr and I see no reason to differ in a writ petition under Article 226 from the reasons contained in the said paragraph 6 of the AAIFR. In paragraph 6 of the order, plea of natural justice violation has been rightly rejected by the aaifr and I see no reason to differ in a writ petition under Article 226 from the reasons contained in the said paragraph 6 of the AAIFR. Insofar as violation of natural justice is concerned, the plea is clearly governed by the principle of law laid down by the Hon ble Supreme Court in 1996 (3) SCC 364 , where paragraph 33 reads as under:- "33. We may summarise the principles emerging from the above discussion. (These are by no means intended to be exhaustive and are evolved keeping in view the context of disciplinary enquiries and orders of punishment imposed by an employer upon the employee): (1) An order passed imposing a punishment on an employee consequent upon a disciplinary/ departmental enquiry in violation of the rules/regulations/statutory provisions governing such enquiries should not be set aside automatically. The Court of the tribunal should enquire whether (a) the provision violated is of a substantive nature or (b) whether it is procedural in character. (2) A substantive provision has normally to be complied with as explained here in before and the theory of substantial compliance or the test of prejudice would not be applicable in such a case. (3) In the case of violation of a procedural provision, the position is this procedural provisions are generally meant for affording a reasonable and adequate opportunity to the delinquent officer/employee. They are, generally speaking, conceived in his interest. Violation of any and every procedural provision cannot be said to automatically vitiate the enquiry held or order passed - Except cases falling under "no notice", no opportunity" and no "no hearing" categories, the complaint of violation of procedural provision should be examined from the point of view of prejudice viz. , whether such violation has prejudiced the delinquent officer/employee in defending himself properly and effectively. If it is found that he has been so prejudiced, appropriate orders have to be made to repair and remedy the prejudice including setting aside the enquiry and/or the order of punishment. If no prejudice is established to have resulted therefrom, it is obvious, no interference is called for. In this connection, it may be remembered that there may be certain procedural provisions which are of a fundamental character, whose violation is by itself proof of prejudice. If no prejudice is established to have resulted therefrom, it is obvious, no interference is called for. In this connection, it may be remembered that there may be certain procedural provisions which are of a fundamental character, whose violation is by itself proof of prejudice. The Court may not insist on proof of prejudice in such cases. As explained in the body of the judgment, take a case where there is a provision expressly providing that after the evidence of the employer/government is over, the employee shall be given an opportunity to lead defence in his evidence, and in a given case, the enquiry officer does not give that opportunity in spite of the delinquent officer/employee asking for it. The prejudice is self-evident. No proof of prejudice as such need be called for in such a case. To repeat, the test is one of prejudice, i. e. , whether the person has received a fair hearing considering all things. Now, this very aspect can also be looked at from the point of view of directory and mandatory provisions, if one is so inclined. The principle stated under (4) hereinbelow is only another way of looking at the same aspect as is dealt with herein and not a different or distinct principle. (4) (A) In the case of a procedural provision which is not of a mandatory character, the complaint of violation has to be examined from the standpoint of substantial compliance. Be that as It may, the order passed in violation of such a provision can be set aside only where such violation has occasioned prejudice to the delinquent employee. (B) In the case of violation of a procedural provision, which is of a mandatory character, it has to be ascertained whether the provision is conceived in the interest of the person proceeded against or in public interest. If it is found to be the former, then it must be seen whether the delinquent officer has waived the said requirement, either expressly or by his conduct. If he is found to have waived it, then the order of punishment cannot be set aside on the ground of the said violation. If it is found to be the former, then it must be seen whether the delinquent officer has waived the said requirement, either expressly or by his conduct. If he is found to have waived it, then the order of punishment cannot be set aside on the ground of the said violation. If, on the other hand, it is found that the delinquent officer/employee has not waived it or that the provision could not be waived by him, then the Court or Tribunal should make appropriate directions (include the setting aside of the order of punishment), keeping in mind the approach adopted by the Constitution bench in B. Karunakar. The ultimate test is always the same, viz. , test of prejudice or the test of fair hearing, as it may be called. (5) Where the enquiry is not governed by any rules/regulation/statutory provisions and the only obligation is to observe the principles of natural justice -- or, for that matter, wherever such principles are held to be implied by the very nature and impact of the order/action - the Court or the Tribunal should make a distinction between a total violation of natural justice (rule of audi alteram partem) and violation of a facet of the said rule, as explained in the body of the judgment. In other words, a distinction must be made between "no opportunity" and no adequate opportunity, i. e. between "no notice"/"no hearing" and "no fair hearing". (a) In the case of former, the order passed would undoubtedly be invalid (one may call it "void" or a nullity if one chooses to ). In such cases, normally, liberty will be reserved for the Authority to take proceedings afresh according to law, i. e. , in accordance with the said rule (audi alteram partem ). (b) But in the latter case, the effect of violation (of a facet of the rule of audi alteram partem) has to be examined from the standpoint of prejudice; in other words, what the Court or Tribunal has to see is whether in the totality, of the circumstances, the delinquent officer/ employee did or did not have a fair hearing and the orders to be made shall depend upon the answer to the said query. [it is made clear that this principle (No. 5) does not apply in the case of rule against bias, the test in which behalf are laid down elsewhere. ] (6) While applying the rule of audi alteram partem (the primary principle of natural justice) the Court/ Tribunal/authority must. always bear in mind the ultimate and overriding objective underlying the said rule, viz. , to ensure a fair hearing and to ensure that there is no failure of justice. It is this objective which should guide them in applying the rule to varying situation that arise before them. (7) There may be situations where the interest of State or public interest may call for a curtailing of the rule of audi alteram partem. In such situations, the Court may have to balance public/state interest with the requirement of natural justice and arrive at an appropriate decision. " ( 16 ) IN accordance with the position of law laid down above, I have no hesitation, after considering the findings of facts recorded by the BIFR and AAFIR, in coming to a conclusion, that any kind of prejudice has been caused to the petitioners and thus there is no failure of justice and there is no violation of the audi alteram partem rule in view of the above position of law laid down by the Hon ble Supreme Court. The perusal of the proceedings before the BIFR and AAIFR clearly indicates that the petitioners received a fair hearing before both the said authorities. ( 17 ) THE other legal plea, raised by the petitioners is that the Order of the AAIFR seeks to debar the petitioners from filing further references in subsequent accounting years. In my view, this is not a correct reading of the aaifr s impugned Orders dated 6th and 13th June, 2000. The relevant portion of the said Order dated 6th June, 2000 reads as follows: "we have come to the conclusion, as will be clear from the detailed order to follow, that the accounts of the appellant company are manipulated and figures have been fabricated and that there has been diversion and siphoning away of funds. The relevant portion of the said Order dated 6th June, 2000 reads as follows: "we have come to the conclusion, as will be clear from the detailed order to follow, that the accounts of the appellant company are manipulated and figures have been fabricated and that there has been diversion and siphoning away of funds. In fact, the accounts are totally unreliable and no reference u/s 15 (1) of SICA can be entertained on the basis of accounts for any subsequent year which are derived from the appellant company s accounts for the accounting periods ended on 31/12/97 and 30/6/98. " ( 18 ) THE Appellate Authority has rightly held that since the accounting policies followed by the petitioners were totally unreliable, references could not be entertained based on the accounts of subsequent years which were derived from the petitioner No. 1 s company s accounts for the period ended 31. 12. 1997 and 30. 6. 1998. In my view, this finding recorded by the AAIFR in Order dated 13. 6. 2002 cannot be construed to mean or lead to barring the petitioners from filing references for subsequent financial years. However, it is made clear that unless and until the deficiency and practices frowned upon by the. AAIFR are corrected, the reference would not be a valid reference. The direction not to process the accounts even of a subsequent year which are derived from the tainted manipulations as found both by BIFR and AAIFR cannot in my view be construed to be a bar from filing the subsequent references upon setting right the anomalies pointed out. 19. A perusal of the Order dated 9th October, 2000, passed by the Division Bench of this Court in Madhumilan Syntex ltd. and Another vs. Appellate Authority for Industrial and financial Reconstruction and Anothers, relied upon by the learned counsel for the petitioners shows that the Hon ble division Bench observed as follows: "the broad directions given by the AAIFR that in future also the petitioner company would not be permitted to approach the authorities does not appear to be in order. and Another vs. Appellate Authority for Industrial and financial Reconstruction and Anothers, relied upon by the learned counsel for the petitioners shows that the Hon ble division Bench observed as follows: "the broad directions given by the AAIFR that in future also the petitioner company would not be permitted to approach the authorities does not appear to be in order. In the circumstances, while not entertaining this writ petition, make it clear that if, for any subsequent period, any reference has been made or is made, the same shall be dealt with and examined by the authority under the Act by taking note of the accounts position and other relevant aspects requisite for adjudication of the question as to whether the applicant is a sick company or otherwise. "the setting right of dubious accounting methods. frowned upon by the BIFR and AAIFR, would certainty fall within the "accounts position, and other relevant aspects" referred to as by the Hon ble Division Bench and consequently the Order of the AAIFR is in consonance with the position of law laid down by this Court in Madhumilan syntex s decision (supra ). ( 19 ) IN my view, the findings of the AAIFR are fully in consonance with the aforesaid position of law and it is further made clear that there. is no bar to filing of the future references for subsequent financial years by the petitioners provided the anomalies and malpractices, pointed out by the AAIFR are corrected. Even otherwise the conduct of the directors of the company, in manipulating the accounts and dealing with shareholders interest in a manner lacking in probity as concurrently found by the BIFR and AAIFR, would disentitle the petitioners from seeking the discretionary remedy under Article 226 of the Constitution of India. ( 20 ) IN this view of the matter, there is no merit in the writ petition which is accordingly dismissed with costs, quantified at Rs. 10,000/- payable to the Delhi State Legal aid Authority, Patiala House Courts, New Delhi within 4 weeks from today. Consequently, all interim Orders stand vacated with effect from 1st May, 2002. --- *** --- .