Resolution:
If BWC and BWFB are installed, then Platform War for BWC needs to be created before starting the external servlet engine using the start-&ltport> command under /tra/domain/&ltdomain_name>/Tomcat/bin.

This is more of the sequence in which the actions are performed.

After installing BWC 5.2, BWFB 5.2 and Tomcat 5.0.28.
Start Administrator and Hawk agent (if not running)
Create Platform War (BWC) using domainutility
Register Servlet Engine (Tomcat 5.0.28) to the Admin Domain
Started Tomcat using the start-&ltport> command under /tra/domain/&ltdomain_name>/Tomcat/bin

This will avoid the error "java.lang.IllegalArgumentException: Document base /home/akhan/tibco/bwc/5.2/deployment/applets/lib does not exist or is not a readable directory".