PAAM PHARMACEUTICAL DELHI LIMITED Vs. UNION OF INDIA

JUDGEMENT

(1.) Petitioner challenges order dated 26th May, 2000 passed by the Appellate Authority for Industrial and Financial Reconstruction, (in short, AAIFR). By said order it was held that petitioner is not a sick company under the Sick Industrial Companies (Special Provisions) Act, 1985 (in short the Act). Factual background in a nutshell is as follows:

(2.) Reference under Section 15(1) of the Act was filed by the petitioner before the Board For Industrial and Financial Reconstruction (in short, BIFR). Reports had been received from Industrial Development Bank of India, (in short, IDBI), and Punjab National Bank (in short-PNB) that the company's operations had been manageable till 1996-97, but in incurred huge loss of Rs. 130.86 crores during the period ending 30.9.1998 mainly on account of very high interest expenses of Rs. 46.82 crores. For previous year the loss was Rs. 13.20 erores for 12 months. Provision for bad debts to the extent of Rs. 43.90 crores (previous year-nil) and loss of Rs. 16.55 crores shown during the period due to expired/soiled goods (previous year-nil). From the nature of exceptional loss/provision shown by the company in one accounting period it appeared that an attempt by the company to avoid suits filed/likely to be filed against them would not be fruitful. BIFR noted that IDBI had not given any direct comments whether the company was sick or not. It noted that Drug Controller certified about destruction of stocks lifted from debtors, and Rs.16.00 crores worth of stocks were destroyed because they were not fit for human consumption and were destroyed in the presence of Drugs Inspector. Interest cost had gone up because the company had to borrow from outside source at a very high rate of interest.It had purchased high value raw-material for Bhiwadi Expansion Prefect,but because of the entry of multi-national companies, it had a tough time competing with them. Ultimately, it was concluded that petitioner was a sick company. It was of the opinion that company could not revive on its own and it was necessary in public interest to take measures provided under Section 18 of the Act. Accordingly, it appointed IDBI as the Operating Agency, (PA, for. short,) under Section 17(3) to examine the viability of the company and for. formulating a rehabilitation scheme for its revival if it .was found viable. Said order of the BFIR. was challenged in appeal before AAIFR by respondent No-5. The said respondent, is, a creditor of petitioner company and is hereinafter referred ,to as creditor. It gave deposit against personal guarantee of Anil Bhargava Chairman of the company, and; Arvind Bhargava, Director besides the securitisation by way of pledge/transfer of, equity shares of petitioner company and Pam Drugs and Pharmaceuticals Ltd (in short PDPL) which were declared to be freely transferable. It was noticed by the creditor that shares of PDPL given as security to it for its inter corporate deposits' were duplicates and were under the lock-in-period, whereas endorsement of lock-in- period was not made on the share certificates. It was therefore, defrauded by petitioner and its CMD. Additionally, it was stated that the company was not a sick one and by manipulating records a show of sickness was being presented. AAIFR found certain factual aspects to be of relevance and ultimately held that petitioner was not a sick company. Several irregularities were highlighted by it by observing that there was manipulation of records and attempt to present a very bleak picture of financial position. Il noted that there was a claim of destruction of certain articles on 10.7.1998. These were stated to be expired goods. With respect to claim of expired goods, it was pointed out that such goods can be related only to previous years' production and not from current year's production because normally expiry period of drugs mentioned in the list of drugs alleged to have been destroyed exceeds two years. Again spoiled; goods do not form part of the valued inventory and in the account for financial year 1997 there was no mention of expired or spoiled goods being carried over to current year value of inventory i.e. as on 31.3.1997 was Rs.40.90 crores. (rounded off) which is reduced to 8.35 crores (rounded off) as on 30.9.1998 without corresponding increase in sales. It was observed that petitioner did not comply with the PNB's demand for information about.movement of certain, stock (ten items). List,of goods which; petitioner claimed to have destroyed by burning on 10.7.1998 includes those ten items of stocks arid exactly the same quantities, apart from about 2 million units of 69 formulations of various medicines. No intimation was given to PNB or any other member of consortium banks about the proposed destruction.PNB had sought details about,movement of ten items of raw materials, because these were not found in stock at the time of the visit of representatives of the consortium, banks and no evidence about their movement was produced. AAIFR found it strange; that a -prudent person, who wants to destroy goods which are hypothecated to banks or against which he has, taken finance from banks, would insist on prior consent of such banks to theproposed destruction and would also insist that a representative of the bank would remain present to certify the destruction of goods. This was not done. It; was also noticed that though a certificate stated to have been issued by Senior Drugs Inspector was produced, the same did not indicate batch numbers, dates Of manufacture and dates of expiry and no affidavait from the Senior Drugs Inspector was produced. Another factor which weighed with AAIFR was that petitioner had made a provision of Rs.43.90 crores for bad debts in the year ending 31.3.1998. Rs 8.79 , crores was shown to be due for more than six months. Figure increased to Rs.83.13 crores in the next financial year This was unusual as the difference was Rs.74.34 crores when the sales turnover of the year ending 31.3.1998 was Rs.92.85-crores. Bad debts were claimed with. a view to inflate debtors figures and claim bad debt. It was; further indicated that there was a claim of destruction of expired date drugs on 15.1.1999. Here again, defects were noticed. Quantities said to have been destroyed works out to 2; billion units of 66 formulations in 35,61,047 packaging. Quantity amounts to more than 100 large size truck load. AAIFR found it mind boggling that on one working day such a huge stock could be destroyed. Another interesting feature which AAIFR noticed was that at the' time of hearing before BFIR on 31.3.1999 counsel had stated that they would furnish a personal'affidavit from CMD along with amountwise details, of the stock destroyed as also a certificate from the Chartered Accountant in this regard within a . week. Copies of- documents presented by petitioner in its reply indicate the CMD'S affidavit is dated 12.4.99, it is attested by oath commissioner on 15.4.99. Chartered Accountants 'certificates are dated 25 .-6,99 which are based on certification by the management. The dates clearly indicate the unreliability of these documents.

(3.) AAIFR on analysis of the factual position recorded the following finding (a) Shri Anil Bhargava's grievance that the appellant has come in appeal even though most of its dues have been settled and paid has ho force in favour of PPL. The appellant is a creditor of PPL and is adversely affected by the impugned order and, therefore, has a statutory right of appeal u/s 25 of SICA. (b) Shri Ail Bhargava's contention regarding red tapism in bank and their not coming up as appellants does not have any force in favour of PPL. (c) Shri Anil Bhargava's contention that PPL had become sick much earlier is not borne out by PPL/s accounts which show that up to financial year 1997 it was a profit making and dividend paying company. (d) Shri Anil Bhargava's contention based on inadequacy of cash credit facility from banks is also not borne out by PPL's accounts. Shor-term loans as cash credit facility from banks against hypothecation of raw materials, works in process, finished goods and books debts were, according to the PPL's accounts: Rs.17.14 cr (FY 96), Rs. 27.42 cr (FY 97) and Rs. 43.50 cr (FY 98). Despite increase in the exposure of banks during FY 98, sales drastically declined. (e) Note "4" of Notes on Account for FY 97 indicates, as referred to in paragraph 7(a) above, that the value of realization of current assets (which inter alia include-sundry debtors) in the ordinary course of business will not be less than the amount at which they are stated in the balance sheet. If this is correct, the entire provision of Rs.43.90 crore for bad and doubtul debts relates to the sales during FY 98. Such a huge write-off of "receivables" without any effort for recovery is not accepted. (f) The story of destruction of expired date drugs valued at Rs.33.88 crores (rounded off) on 15.1.99 (PPL claims these to be part of the provisions for bad and doubtful debts during FY 98 ended on 30.9.98) is not acceptable as discussed below: (g) PPL had availed of finance from banks against the stock purported to have been destroyed on 15.1.99. Any honest and prudent person, wanting to destroy goods hypothecated to banks from whom he has taken finance therefore, would insist on creditor banks to send their representatives verify physically and remain present at the time of destruction. PPL did riot act in this manner.. In fact, even intimation of the proposed destruction was not given by PPL to the creditor banks. (h) The zerox copy of the certificate purported to have been given by the Regional Inspector of Drug on 15.1.99 does not indicate the place and mode of destruction. Again, it does not indicate the batch number, the date of manufacture and the date of against any of the items in the list. (i) The quantity stated to have been destroyed works out to two billion (200 crores) units of drugs 66 formulations (tablets, capsules, syrups, injections)in 35,61,047 packaging; the quantity amounts of more than 100 large size truckloads. The amount of effort (in terms of manpower, size of incinerators, power or fuel, if destruction is by burning, etc.) for physical verification and destruction of such a huge quantity in the span of one working day is mind boggling. PPL claimed in response to a query from the Bench that no witness was present apart from the Regional Drug Inspector and PPL's representative. (j) No affidavit from the Regional Drug Inspector has been produced and there was no cross examination The contention of the learned counsel for PPL based on Section 114 of the Indian Evidence Act and illustration (e) there under is rejected on the ground of absolute improbability.