SICA| Rehabilitation Scheme Binding On All Creditors Including Unsecured Creditors, Dues Cannot Be Recovered After Revival- SC

Update: 2023-03-21 05:45 GMT

A Supreme Court Bench of Justice MR Shah and Justice Sudhanshu Dhulia has observed that the rehabilitation scheme under the Sick Industrial Companies Act of 1985 shall be binding on all creditors, including unsecured creditors. It was further clarified that the dues cannot be recovered after the revival of the said sick company.

Senior Counsel Jayant Bhushan and Senior Advocate CU Singh appeared for the Appellant side. Counsel PS Sudheer appeared for the Respondent.

In this case, a Scheme of Rehabilitation for the Respondent company was approved under the Sick Industrial Companies Act of 1985 (SICA). As per the scheme, the creditors of the Company were to be paid scaled-down values of their dues.

The Appellant was an unsecured creditor of the Respondent company was dissatisfied with the scaling down of the dues. Consequently, the Appellant filed a writ petition.

The issue for consideration before the Supreme Court was whether, on approval of a scheme by the Board for Industrial and Financial Reconstruction (BIFR) under the Sick Industrial Companies (Special Provisions) Act, 1985, an unsecured creditor has the option not to accept the scaled-down value of its dues, and to wait till the scheme for rehabilitation of the respondent-sick company has worked itself out, with an option to recover the debt with interest post such rehabilitation.

The Supreme Court observed that "the SICA, 1985 basically and predominantly is a remedial and ameliorative enactment, insofar as it empowers a quasi-judicial Body - BIFR to take appropriate measures for revival and rehabilitation of the potentially viable sick industrial companies as quickly as possible and also to salvage the productive assets and realise the amounts due to the banks and financial institutions, to the extent possible, from the non-viable sick industrial companies through liquidation of those companies."

The Court also observed that the primary concern of the Board would be the revival of the sick company and to save the sick company from winding up. 

Relying on a catena of cases including Tata Motors Limited Vs. Pharmaceutical Products of India Limited and Anr., the Court held that the provisions of SICA, 1985 shall normally override other laws except the laws, which have been specifically excluded by the legislature under Section 32 of SICA, 1985. 

Referring to the provisions of Section 18 and the operating agency, the Court took the considered view that "The operating agency is defined under Section 3(i) and it means any public financial institution, State-level institution, scheduled bank or any other person as may be specified by general or special order as its agency by the Board. No other persons including the unsecured creditors comes into picture like preparing the scheme under Section 18. Section 18 of the SICA does not provide that at the time of preparing of the scheme under Section 18 or when it is sanctioned by the Board, the unsecured creditors are required to be heard. The only provision for the consent required is Section 19 and the agency/person, who is required to give the financial assistance, its consent is required. Once the rehabilitation scheme / scheme under Section 18 prepared by the operating agency is sanctioned by the BIFR, which may include the scaling down the value of dues of the unsecured creditors, the same shall bind all, otherwise the rehabilitation scheme shall not be workable at all and the object and purpose of enactment of the SICA, 1985 will befrustrated. If some persons / unsecured creditors and/or even the labourers are permitted to get out of the purview of the scheme and thereafter permitting such or some of the unsecured creditors to wait till the scheme for rehabilitation of the sick company has worked itself out, in that case, the scheme shall not be workable at all. To make the company viable, the concerned persons including the unsecured creditors have to sacrifice to some extent otherwise the revival efforts shall fail."

Subsequently, the Court also noted that if a sick company is required to wind up, the unsecured creditors may get nothing, but under the rehabilitation scheme, the unsecured creditors may get part of their dues /debts, which otherwise, they may not get. In that context, it was said that "as per Section 18(8) of SICA, 1985, which has been substituted by Act 12 of 1994, on and from the date of the coming into operation of the sanctioned scheme or any provision thereof, the scheme or such provision shall be binding on the sick industrial company and the transferee company or, as the case may be, the other company and also on the shareholders, creditors and guarantors and even the employees of the said companies."

In furtherance of the same, the Court observed that "If the scheme binds the creditors, including other creditors like financial institutions etc., who may have a better claim than the unsecured creditors, there is no reason to treat the unsecured creditors separately and not to treat them as creditors. Therefore, even as per Section 18(8), the scheme shall bind all the creditors and guarantors and even the employees of the sick company, for whose revival the scheme is sanctioned."

Regarding the submission that the unsecured creditors should have an option not to accept the scaled down value of its dues and to wait till the scheme for rehabilitation of the sick company has worked itself out, with an option to recover the debt post such rehabilitation is concerned, the Court rejected the argument and observed that "in a given case, because of the scaling down of the value of the dues of the creditors, the company survives. The company has survived in view of the rehabilitation scheme because of the sacrifice / scaling down the value of the dues of the creditors including the financial institutions. How such a benefit can be permitted to be given to the unsecured creditors, who does not accept the scaled down value of its dues. Such an unsecured creditor cannot be permitted to take the benefit of the revival scheme, which is at the cost of other creditors including the financial institutions and even the labourers."

Consequently, the appeals were allowed and the order of the High Court was quashed.

Cause Title: Modi Rubber Limited v. Continental Carbon India Ltd.

Click here to read/download the Judgment 


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