Mumbai, Dec 2: The Supreme Court on Thursday has ruled that the examination of the correctness of a company's balance sheet is not the exclusive "domain" of the Board for Industrial & Financial Reconstruction (BIFR) and that banks and financial institutions would have the right to appeal in a court . The SC ruling, given by a three-judge bench, in effect stalls the practice-adopted by many a corporate-of knocking at the BIFR's door and declaring the company sick merely by changing the accounting system.The judgement was given in a litigation involving term-lending institution ICICI and Calcutta-based granite producer Ceeta.The Rs 26-crore company, promoted by KM Poddar & Associates, has been restrained to act and to give any effect to the balance sheet in question (1998-99) until final disposal of the case by the courts. Former finance minister P Chidambaram represented the Calcutta-based company in the Supreme Court.
So far, companies, which had filed an application with the Board of Industrial Financial Reconstruction (BIFR), were protected from any proceedings until the Appellate Authority for Financial Reconstruction (AAIFR) approved the scheme of restructuring. The Sick Industrial Companies Act (SICA) of 1985 has provided for the setting up of the BIFR and AAIFR to protect legitimate sickness of companies, which is now being misused to siphon off funds by promoters.
The three-judge bench of the Supreme Court-justices Kripal, MJ Rao and AN Mishra- ruled that BIFR will no longer have exclusive rights to examine the veracity of balance sheets. The ICICI moved the Calcutta high court against Ceeta when it changed the accounting practice-from straight line to written down value method of calculating depreciation-in the March 1999 balance sheet and declared itself sick. The institution challenged the correctness of the balance sheet. A single-judge bench of the Calcutta high cout passed the order of injunction which was later reversed by a division bench when the company made an appeal. Finally, ICICI moved the Supreme Court and got a fresh injunction on Thursday.
Until now, the BIFR route was being rampantly misused by promoters who either wanted to siphon off funds to sister concerns or private investment companies and even to avoid paying up huge outstandings to banks and institutions. Once an application for industrial sickness is filed with the BIFR, the board had the singular right of examining the veracity of the balance sheet.
During the passing of accounts the institutional nominees on the board of companies were often powerless to veto any anomalies that might surface. Even if the nominees objected, the objections would be overruled by the majority of the company representative on the board.
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.