2008 (8) TMI 566 - HC - Companies Law

Court denies SICA protection for post-reference debts, underscores compliance with obligations pre-winding up.

The court rejected the respondent's argument for protection under the Sick Industrial Companies (Special Provisions) Act, emphasizing that debts incurred ... Winding up - petitioners claimed unpaid price of goods sold and supplied during the period from September, 2006 to May, 2007 - whether respondent entitled to protection under sections 22 and 21(a) of the Sick Industrial Companies (Special Provisions) Act, 1985? Held that:- In the present case, the respondent-company is not entitled to invoke the protection of section 22 in respect of transactions for purchase of goods after the reference was registered with the BIFR on 15-12-2005. Indeed, section 22 cannot be used as a shield against the recovery of debts such as unpaid price of goods, particularly, when the goods have been purchased after the reference has been registered since such transactions and the debts incurred thereon are outside the provisions which culminate in a scheme. Thus where a company has consciously entered into transactions, created liabilities and incurred debts whether an enquiry is pending or whether the scheme has been framed under the SICA, the bar under section 22 would not apply. There is, thus, no merit in this contention. Issues Involved:Petition for winding up of a company under sections 433 and 434 of the Companies Act, 1956 due to unpaid price of goods sold and supplied. Protection under sections 22 and 21(a) of the Sick Industrial Companies (Special Provisions) Act, 1985 invoked by the respondent-company. Interpretation of section 22 of the SICA in relation to transactions occurring after the registration of reference with the BIFR. Whether debts incurred for goods purchased after the reference was registered fall within the protection of section 22. Impact of pending scheme under SICA on recovery proceedings and applicability of section 22.Analysis:The petition sought winding up of the respondent-company for unpaid goods sold and supplied. The respondent claimed protection under sections 22 and 21(a) of the SICA due to a reference registered on a specific date. The petitioner argued that section 22 should not shield the company from debts incurred post-registration. Precedents were cited to support this argument, emphasizing the need for companies to pay for goods purchased after the reference before seeking protection under section 22. The judgment referenced a case highlighting the importance of not impeding recovery of debts to ensure the effectiveness of the SICA in reviving sick units.The judgment referred to decisions by various High Courts affirming that transactions occurring after the reference, not covered by the scheme, do not fall under the protection of section 22. It emphasized the need for companies to fulfill their obligations for goods purchased post-registration before seeking protection under the SICA. The judgment further discussed the implications of pending schemes under the SICA on recovery proceedings, stating that debts incurred outside the scheme are not protected by section 22.The court rejected the respondent's argument that the absence of a framed scheme precludes debt recovery proceedings, emphasizing that section 22 does not shield companies consciously incurring debts post-reference. It highlighted that the bar under section 22 does not apply when a company continues to create liabilities and incur debts despite SICA proceedings. Consequently, the court allowed the petition for winding up the company, emphasizing that debts incurred for goods purchased after the reference are not protected under section 22.