2016 (6) TMI 241 - HC - Indian Laws

Division Bench questions unsecured creditors' consent for reduced payments under Sick Industrial Companies Act

Singer India Ltd. Versus TVS Sewing Needles Limited & Ors

Singer India Ltd. Versus TVS Sewing Needles Limited & Ors - TMI Issues Involved:1. Validity of the decision in Continental Carbon India Ltd. Vs. Modi Rubber Ltd.2. Jurisdiction of BIFR under SICA.3. Binding nature of rehabilitation schemes on unsecured creditors.4. Distinction between secured and unsecured creditors under SICA.5. Requirement of consent from unsecured creditors for debt reduction in rehabilitation schemes.Issue-Wise Detailed Analysis:1. Validity of the decision in Continental Carbon India Ltd. Vs. Modi Rubber Ltd.:The primary issue debated was whether the decision dated July 31, 2012, by the Division Bench in Continental Carbon India Ltd. Vs. Modi Rubber Ltd. reached an incorrect conclusion due to oversight. The question posed was whether an unsecured creditor, under a BIFR-approved scheme, could choose not to accept the scaled-down value of its dues and wait to recover the debt with interest post-rehabilitation. The Division Bench answered affirmatively, allowing unsecured creditors to defer accepting reduced payments until the company was financially rehabilitated. The Division Bench emphasized that the contract between the parties could not be compulsorily overridden by SICA provisions if the creditor was willing to wait until the company was rehabilitated.2. Jurisdiction of BIFR under SICA:The jurisdiction of BIFR was discussed in the context of its authority over a company declared sick until the end of the rehabilitation period as per Sections 18(2) and 18(9) of SICA. The Division Bench noted that while BIFR retained jurisdiction, there was a distinction between the absence of the requirement of consent by an unsecured creditor and compelling an unsecured creditor to write off part of its dues. The Division Bench opined that BIFR could not compel unsecured creditors to accept a reduced payment without their consent.3. Binding nature of rehabilitation schemes on unsecured creditors:The Division Bench highlighted that Section 18(8) of SICA, amended by the Amendment Act of 1993, made the scheme binding on the creditors of the sick company. However, it inferred that a scheme under Section 18 could not provide for the discharge of any encumbrance created by the sick company or for the reduction of its liabilities to unsecured creditors without their consent. The Division Bench concluded that while unsecured creditors' rights to claim debts would be postponed by an approved scheme, they were not compelled to accept reduced payments.4. Distinction between secured and unsecured creditors under SICA:The Division Bench noted that there was no provision in Section 18(2) of SICA for payment to creditors in satisfaction of their claim 'as so reduced,' unlike other Acts such as the Industrial Reconstruction Bank of India Act, 1984, the Banking Regulation Act, 1949, and the Industries Development and Regulation Act, 1951. The Division Bench emphasized that there was no distinction between secured and unsecured creditors except for those required to provide financial assistance under a scheme.5. Requirement of consent from unsecured creditors for debt reduction in rehabilitation schemes:The Division Bench considered various precedents and distinguished them based on slightly different questions. It concluded that unsecured creditors could not be compelled to accept reduced payments without their consent. The Division Bench highlighted that the objective of SICA was public interest, and while it was not necessary for BIFR to obtain unsecured creditors' consent while sanctioning a scheme, it could not compel them to provide concessions.Conclusion:The Division Bench's decision in Continental Carbon India Ltd. Vs. Modi Rubber Ltd. was scrutinized, and it was concluded that the decision might not have fully appreciated the mandate and scope of Section 18 of SICA. The matter was referred to a Larger Bench to address whether BIFR had broad and extensive powers to take necessary measures for the revival of a sick company and whether a rehabilitation scheme reducing unsecured creditors' debt was binding without their consent. Pending adjudication, unsecured creditors who had not opted under the scheme were restrained from taking coercive actions to recover their dues.