375 OF 2017 Modi Rubber Limited…Appellant(s) Versus Continental Carbon India Ltd. 377 OF 2017 OCL India Limited…Appellant(s) Versus Andrew Yule & Co.
Civil Appeal
No 377 of 2017 2.1 Feeling aggrieved and dissatisfied with the impugned judgment and order passed by the High Court of Delhi at New Delhi passed in Writ Petition (C) No 8154 of 2010 by which the Division Bench of the High Court has dismissed the said writ petition preferred by the appellant herein confirming the orders passed by BIFR and AAIFR taking the view that the appellant herein, on obtaining the decree in its favour has to stand in the queue alongwith other unsecured creditors, who were to be given 54 paisa in a rupee as per the scheme of revival sanctioned under the SICA, the original writ petitioner – OCL India Ltd. Civil Appeal No 379 of 2017 2.2 Feeling aggrieved and dissatisfied with the impugned judgment and order passed by the Division Bench of the High Court of Delhi at New Delhi dated 02.03.2016 passed in Writ Petition (C)
No 832 of 2016 by which the Division Bench of the High Court has doubted the correctness of the judgment and order passed by the High Court of Delhi in the case of Continental Carbon India Ltd.
No 379 of 2017 as the issue involved in the writ petition is the same arising in Civil appeal No 375 of 2017 as the correctness of the said decision, which is the subject matter of Civil Appeal No 375 of 2017 is doubted in Writ Petition (C) No 832 of 2016. 7390.20 LACS) Pressing creditors have been identified as under:- Raw Material Suppliers : 2690.50 Acceptances : 3908.37 Dealers and C & F : 289.33 Inter corporate deposits : 500.00 The above creditors shall accept their outstanding dues as per one of the following three options: a) To accept 30% of the principal outstanding as full and final payment. The first installment shall be payable within 3 months of the sanction of the Scheme by the BIFR c) To accept 50% of the principal outstanding as full and final payment.
5 By the impugned judgment and order, the Division Bench of the High Court has allowed the writ petition and has set aside the order passe by the AAIFR dated 23.06.2011 by holding that the respondent No. The impugned judgment and order passed by the Division Bench of the High Court is the subject matter of present Civil Appeal No 375 of 2017. That in the instant case, notwithstanding the mandatory provisions of Section 18(8) of SICA read with Section 32 of SICA, the High Court by the impugned judgment and order has allowed the unsecured creditor to stay outside the rigours of the scheme sanctioned under Section 18(4) of SICA read with Section 32 of SICA; (ii) The schemes whether under the Companies Act or under specific insolvency legislations like, SICA are binding on all the creditors including the decree holders / arbitration award holders / industrial award holders covered by the scheme. It is submitted that once the rehabilitation scheme is sanctioned under the statutory provisions of the SICA, the concerned insolvent companies can lead a debt free future life and can use this as a second chance / fresh start to succeed; (iii) That no creditor including the decree holders / arbitration award holders / industrial award holders can claim super priority of their claims specially when the prescribed entities mentioned in Section 19(1) may be required to take severe cuts to help revive sick companies, the other creditors including the decree holders / arbitration award holders / industrial award holders cannot claim to have better rights; (iv) Learned senior counsel appearing on behalf of the appellant has taken us to the object and purpose of SICA, 1985. It is submitted that SICA, 1985 was not a consent based regime rather it was an operation by law based regime; (v) It is further submitted by learned senior counsel appearing on behalf of the appellant that in case of insolvent company, from practical and commercial point of view, there is in effect, no scaling down of debt of ordinary creditors – unsecured creditors as the real market value of debts owed to the ordinary creditors including the decree holders / arbitration award holders / industrial award holders covered by the scheme is nothing. It is submitted that the Parliaments of different countries recognized the need to have separate insolvency legislations as the fallout of insolvency and eventual winding up leading to dissolution of companies was having serious economic and social implications for the society at large; (vii) It is further submitted that the commercial laws have two types of laws, one, mandatory laws and second, permissive opting out laws.
Decree holders or award holders do not form a separate class; (ix) On the scheme of SICA, more particularly, the rehabilitation scheme, it is submitted as under :- a) Section 18(1) deals with the measures that a scheme with respect to a sick industrial company can provide for. Section 18(1)(f) is the residuary clause dealing with incidental, consequential or supplemental measures that may be necessary or expedient in connection with or for the purposes of the measures specified in clauses (a) to (e) of Section 18(1). It is imperative that the consent is given within the prescribed period of 60 days or within such further period not exceeding 60 days, as allowed by BIFR.
f) Section 32 of the SICA provides that the provisions of the scheme framed under the SICA, i.e., the sanctioned scheme, shall override all other laws except the Foreign Exchange Regulations Act, 1973 and the Urban Land (Ceiling and Regulations) Act, 1976. (xii) It is further submitted that Section 22(5) of SICA dealing with exclusion of limitation period cannot be relied upon to argue that it indicates that the dues of the creditors can be deferred to a period when the company’s networth becomes positive or when the scheme is fully implemented. (xiv) Now, so far as the submission on behalf of the respondents that the scaling down/reduction/waiver of dues of creditors is violative of Article 300A of the Constitution of India is concerned, it is submitted that Article 300A of the Constitution of India shall have no application to a rehabilitation scheme sanctioned by BIFR under the framework of SICA. (xv) It is submitted that the High Court has interpreted the provisions of SICA by juxtaposing them with the provisions of Companies Act, 1956 in a way which is contrary to the general principle that no person can stay out of insolvency regime. Pharmaceutical Products of India Limited and Anr., (2008) 7 SCC 619, it is specifically observed and held by this Court that the provisions of a special Act will override the provisions of a general act. It is further observed that in such a case of creditors’ demand, even if not made part of the scheme, would not merely for that reasons stand executed from BIFR’s jurisdiction, which extends to making changes in instruments, documents etc., which create rights and liabilities vis–vis sick industrial company and its properties. (supra) is not in sync with the view taken by the various Division Benches of the High Court, which have been distinguished by the Division Bench in Modi Rubber Ltd. Singh, learned Senior Advocate, appearing on behalf of the appellant / petitioner in Civil Appeal arising out of SLP (C) No 4282 of 2020 has vehemently submitted that the Hon’ble Madhya Pradesh High Court has erred in treating the judgment of the Delhi High Court in the case of Continental Carbon India Ltd. Further, on and from the date of sanction, the scheme and every provision thereof shall be binding on the sick industrial company, and, inter alia, its shareholders, creditors, guarantors, and employees, in terms of section 18(8) of SICA. It is submitted that it is no longer res integra that the provisions of SICA did not envisage any prior consent being obtained from unsecured creditors, yet dues of such unsecured creditors could be completely or partially written off under a revival scheme framed under section 18 of SICA. 3
Also Read: https://newslaw.in/case-type/civil/acquisition-of-land-and-deemed-lapse-under-the-act-2013/
It is further submitted that under Section 18 of SICA, the operating agency prepares a scheme with respect to the sick company and the scheme can provide any of the measures specified in Section 18(1) and 18(2).
6 It is submitted that the scheme framed by the BIFR in terms of the provisions of SICA is binding on all creditors of the sick company and it is not open to any creditor to contend that the scheme framed shall not bind such creditor irrespective of whether such consent of such unsecured creditor was not taken prior to sanction of the scheme. Here, it is necessary to contrast the provisions of Section 22, which provide that legal proceedings, contracts, etc., in respect of a sick company against whom an inquiry is pending under Section 16, or a scheme is under preparation or implementation, etc., shall remain suspended in terms of a declaration of the Board under Section 22(3), and would revive upon the declaration ceasing to have effect [Section 22(4)]. – unsecured creditor has vehemently submitted that the Hon’ble High Court after examining various provisions of the SICA, 1985 and various judgments has answered the question and has held that the unsecured creditor has the option not to accept the scaled down value of its dues and may wait till the scheme of rehabilitation of the sick company has worked itself out with the option to recover its debt post such rehabilitation, which is not required to be interfered with by this Court. It is submitted that sub-clause (e) of sub-section (1) of Section 18 of the SICA provides for preventive, ameliorative and remedial measures as may be appropriate, while Section 19 of the SICA deals with rehabilitation by giving financial assistance qua such preventive, ameliorative and remedial measures. 3 It is submitted that even if Section 18/19 are interpreted as the provisions providing for deprivation of property of an unsecured creditor in the form of sacrifices and that no consent for said sacrifice is required, then also there is no provision in the SICA, 1985 which provides for making an unsecured creditor, in the first place, to be a part of the scheme without his consent. It is submitted that in absence of any provision permitting BIFR to scale down the debts of the unsecured creditor without its consent would be violative of Article 300A of the Constitution. It is submitted that hence, the aforesaid right of the respondent – unsecured creditor to receive the sum of money is a Constitutional Right and, further, the said Constitutional Right to property can be taken away / deprived only by authority of law. 1
It is submitted that in the present case, the appellant company moved an application before the BIFR discharging for the company from the purview of SICA as its net worth has turned positive.
It is submitted that once the appellant on its own motion got discharged from the purview of SICA and such relief having been granted, the appellant thereafter cannot take shelter under any of the provisions of SICA, 1985. 1.3 That the petitioner thereafter challenged the decree dated 21.02.2000 in First Appeal No 65/2000 before the Hon’ble High Court of Madhya Pradesh. 8.1.8 That the petitioner thereafter filed an application seeking direction to the respondent to accept the cheque for a meager amount of Rs 70,452/- in terms of the scheme which is the scaled down value of the claim amount and further prayed for closing the execution proceedings.
1.11 That the Learned Executing Court again vide detailed order dated 06.11.2017 rejected the objections raised by the petitioner. 1.16
That thereafter the matter came up for hearing on 20.05.2022, the petitioner stated that they are willing to deposit the entire decretal amount with the Registry of the Hon’ble Supreme Court. The short question, which is posed for the consideration of this Court is :- “Whether on approval of a scheme by the 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?” 11. While appreciating the submissions made on behalf of the respective parties on the aforesaid issue, few decisions of this Court and the legislative scheme of the SICA, 1985 are required to be referred to:- Legislative Scheme of SICA, 1985 11.1 The framers of law felt that the existing institutional arrangements and procedure for revival and rehabilitation of potentially viable sick industrial companies are both inadequate and time consuming. Therefore, it was imperative to salvage the productive assets and release, to the extent possible, the amounts due to the banks and financial institutions from non-viable sick industrial debtor companies by liquidation of those companies or through formulation of rehabilitation schemes. 5 The statement of Objects and Reasons for enactment of SICA, 1985 is as under:- “Statement of Objects and Reasons.—The ill effects of sickness in industrial companies such as loss of production, loss of employment, loss of revenue to the Central and State Governments and locking up of investible funds of banks and financial institutions are of serious concern to the Government and the society at large.
It would also be equally imperative 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. 7 Now, let us consider the scheme under the BIFR and the relevant provisions of SICA, 1985, which are relevant for our consideration:- “ 35. Section 16 of SICA 1985 deals with the conduct of an inquiry by BIFR and the manner in which BIFR is expected to deal with the matter upon receipt of a reference under Section 15 of SICA 1985. After the inquiry by BIFR or by the operating agency is completed, BIFR if satisfied that the company has become sick and upon considering all relevant facts and circumstances of the case in exercise of its powers under Section 17 of SICA 1985, may pass orders requiring the company to make its net worth exceed the accumulated losses within a reasonable time and for that purpose it may impose such restrictions or conditions as may be specified in the order in terms of Section 17(2) of SICA 1985.
Also Read: https://newslaw.in/case-type/civil/taxation-of-engineering-design-drawings-goods-or-services/
Further, where BIFR decides that it is not practicable for a sick industrial company to make its net worth exceed the accumulated losses within a reasonable time and that it is otherwise necessary or expedient in public interest to adopt all or any of the measures specified in Section 18 of SICA 1985 in relation to the said company, it may, having regard to the guidelines, as may be specified, pass an order formulating a scheme providing for such measures in relation to the sick industrial company.
The scheme which has been prepared in consonance with the provisions of Sections 18(1) and 18(2) then has to be examined by BIFR in terms of Section 18(3) of SICA 1985 and if BIFR makes any modifications to the scheme, the same draft scheme, in brief, shall be published or caused to be published in such daily newspapers as BIFR may consider necessary, for receipt of suggestions and objections, if any. Section 18(7) of SICA 1985 is an important provision which provides that the sanction accorded by BIFR shall be conclusive evidence that all the requirements of the scheme relating to reconstruction or amalgamation or any measure specified therein have been complied with and a copy of the sanctioned scheme certified in writing by an officer of BIFR to be a true copy thereof shall be admissible as evidence in all legal proceedings. Before any financial institution is called upon to proceed to release the financial assistance to the sick industrial company in fulfilment of the requirements in that regard, the procedure contemplated under the provisions of Section 19 of SICA 1985 has to be followed. Where BIFR, after making inquiry under Section 16 of SICA 1985, considering all relevant facts and circumstances and giving an opportunity of being heard to all parties concerned, is of the opinion that the sick industrial company is not likely to make its net worth exceed the accumulated losses within a reasonable time while meeting all its financial obligations and that the company as a result thereof is not likely to become viable in future and that it is just and equitable that the company should be wound up, it may record and forward its opinion to the High Court concerned as per the provisions of Section 20 of SICA 1985 whereafter the company shall be wound up in accordance with the provisions of the Companies Act, 1956.
Section 22 provides for suspension of legal proceedings, contracts etc. On a bare reading of Section 22 and Section 22A of SICA, it appears that these two provisions primarily ensure that the scheme prepared by BIFR does not get frustrated because of certain other legal proceedings and to prevent untimely and unwarranted disposal of the assets of the sick industrial company. 11 As observed and held by this Court in the aforesaid decisions, 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. —(1) Where an order is made under sub-section (3) of Section 17 in relation to any sick industrial company, the operating agency specified in the order shall prepare, as expeditiously as possible and ordinarily within a period of ninety days from the date of such order, a scheme with respect to such company providing for any one or more of the following measures, namely:— (a) the financial reconstruction of the sick industrial company; (b) the proper management of the sick industrial company by change in, or take over of, management of the sick industrial company; (c) the amalgamation of— (i) the sick industrial company with any other company; or (ii) any other company with the sick industrial company; (hereafter in this section, in the case of sub-clause (i), the other company, and in the case of sub-clause (ii), the sick industrial company, referred to as “transferee company”). (2) The scheme referred to in sub-section (1) may provide for any one or more of the following, namely:— (a) the constitution, name and registered office, the capital, assets, powers, rights, interest, authorities and privileges, duties and obligations of the sick industrial company or, as the case may be, of the transferee company; (b) the transfer to the transferee company of the business, properties, assets, and liabilities of the sick industrial company on such terms and conditions as may be specified in the scheme; (c) any change in the Board of Directors, or the appointment of a new Board of Directors, of the sick industrial company and the authority by whom, the manner in which and the other terms and conditions on which, such change or appointment shall be made and in the case of appointment of a new Board of Directors or of any director, the period for which such appointment shall be made; (d) the alteration of the memorandum or articles of association of the sick industrial company or as the case may be, of the transferee company for the purpose of altering the capital structure thereof or for such other purposes as may be necessary to give effect to the reconstruction or amalgamation; (e) [transferee company] and where any shareholder claims payment in cash and not allotment of shares, or where it is not possible to allot shares to any shareholder the payment of cash to those shareholders in full satisfaction of their claims— (i) in respect of their interest in shares in the sick industrial company before its reconstruction or amalgamation; or (ii) where such interest has been reduced under clause (f) in respect of their interest in shares as so reduced; (h) any other terms and conditions for the reconstruction or amalgamation of the sick industrial company; (i) sale of the industrial undertaking of the sick industrial company free from all encumbrances and all liabilities of the company or other such encumbrances and liabilities as may be specified, to any person, including a cooperative society formed by the employees of such undertaking and fixing of reserve price for such sale; (j) lease of the industrial undertaking of the sick industrial company to any person, including a cooperative society formed by the employees of such undertaking; (k) method of sale of the assets of the industrial undertaking of the sick industrial company such as by public auction or by inviting tenders or in any other manner as may be specified and for the manner of publicity therefor (b) The Board may make such modifications, if any, in the draft scheme as it may consider necessary in the light of the suggestions and objections received from the sick industrial company and the operating agency and also from the transferee industrial company and any other company concerned in the amalgamation and from any shareholder or any creditors or employees of such companies: Provided that where the scheme relates to amalgamation 33 (4) The scheme shall thereafter be sanctioned as soon as may be, by the Board (hereinafter referred to as the ‘sanctioned scheme’) and shall come into force on such date as the Board may specify in this behalf: Provided that different dates may be specified for different provisions of the scheme. (7) The sanction accorded by the Board under sub- section (4) shall be conclusive evidence that all the requirements of this scheme relating to the reconstruction or amalgamation, or any other measure specified therein have been complied with and a copy of the sanctioned scheme certified in writing by an officer of the Board to be a true copy thereof, shall, in all legal proceedings (whether in appeal or otherwise) be admitted as evidence. (10) The Board may, if it deems necessary or expedient so to do, by order in writing, direct any operating agency specified in the order to implement a sanctioned scheme with such terms and conditions and in relation to such sick industrial company as may be specified in the order. (12) The Board may monitor periodically the implementation of the sanctioned scheme.” 14 Under Section 18 of the SICA, 1985, it is the operating agency to prepare a scheme with respect to the sick company providing for any one or more of the measures mentioned in Section 18, which include:- (i) the financial reconstruction of the sick industrial company; (ii) such other preventive, ameliorative and remedial measures as may be appropriate.
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 be frustrated. At this stage, it is required to be noted 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. The submission on behalf of the unsecured creditors that the word “creditors” is not defined like IBC, 2016 and therefore, the scheme shall not bind the unsecured creditors, cannot be accepted. (supra) that an unsecured creditor can opt out of the scheme sanctioned by the BIFR under the SICA, 1985 and is allowed not to accept the scaled down value of its dues and may 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 accepted / allowed, in that case, the minority creditors may frustrate the rehabilitation scheme, which may frustrate the object and purpose of enactment of SICA, 1985. Now, so far as the submission on behalf of the unsecured creditors 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 same has no substance and cannot be accepted.
Now, so far as the view taken by the High Court that the unsecured creditor had an option not to accept the scaled down value of its dues and can wait till the scheme for rehabilitation of the company has worked itself out with an option to recover the debt with interest post such rehabilitation is accepted, in a given case, the sick company, which has been able to revive because of the scaling down the value of the dues, may again become sick, if the entire dues of the unsecured creditors are to be paid thereafter. The law permits framing of the scheme taking into consideration and to provide the measures contemplated under Section 18, therefore, the rehabilitation scheme which provides for scaling down the value of dues of the creditors /unsecured creditors and even that of the labourers cannot be said to be violative of Article 300A of the Constitution of India as submitted on behalf of the unsecured creditors. It is observed and held that the rehabilitation scheme under Section 18 of the SICA, 1985 shall bind all the creditors including the unsecured creditors and the unsecured creditors have to accept the scaled down value of its dues provided under the rehabilitation scheme. (iii) Civil Appeal
Case Title: MODI RUBBER LTD. Vs. CONTINENTAL CARBON INDIA LTD. (2023 INSC 246)
Case Number: C.A. No.-000375-000375 / 2017
