2023 (3) TMI 828 - SC - Indian Laws

Unsecured creditors bound by rehabilitation scheme under SICA, 1985

Modi Rubber Limited Versus Continental Carbon India Ltd., OCL India Limited Versus Andrew Yule & Co. Ltd. & Ors., TVS Sewing Needles Ltd. Versus Singer India Ltd. & Ors. And M/s. Titagarh Wagons Limited Versus M/s. Amar Forging Pvt. Ltd. & Ors.

The Supreme Court held that unsecured creditors cannot opt out of accepting scaled-down dues under a rehabilitation scheme sanctioned by BIFR under SICA, ... Recovery of debt - sick companies - Whether on approval of a scheme by the BIFR under the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA), 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? HELD 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 primary concern of the Board would be the revival of the sick company and to save the sick company from winding up. That is why with a view to see that there is no impediment in framing the rehabilitation scheme and to get out the sick company from sickness. 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. These sections clearly state certain restrictions which will impact upon the implementation of the scheme as well as on the assets of the company. As observed and held by this Court in the case of Tata Motors Limited [2008 (5) TMI 423 - SUPREME COURT], SICA, 1985 has been enacted to secure the principles specified in Article 39 of the Constitution of India. It seeks to give effect to the larger public interest and, therefore, it should be given primacy over other laws because of its higher public purpose - In the case of Raheja Universal Limited [2012 (10) TMI 233 - SUPREME COURT], it is observed and held that the SICA, 1985 is a special law, giving overriding effect visà- vis other laws and the provisions of general laws like Companies Act for regulation, incorporation, winding up etc. of the companies would have still been overridden to the extent of inconsistency. Thus, 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. At this stage, it is required to be noted that if a sick company is ordered to be wind up, in that case, the unsecured creditors otherwise may not get anything. However, on the other hand on sanctioning the rehabilitation scheme under Section 18, the unsecured creditors may get part of their dues /debts, which otherwise, they may not get. 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 intention of the legislature is very clear. Creditors includes unsecured creditors. 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. Looking to the object and purpose of the SICA, 1985 and the provisions of Sections 18 and 19 of the SICA, 1985, the word “creditors” shall have to be construed in a broad manner and is not required to be construed narrowly, otherwise, the object and purpose of rehabilitation scheme shall be frustrated. 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. Thus, the primary object and purpose of SICA, 1985 is revival of a sick industrial company even by providing rehabilitation scheme under Section 18. A reading of the statement of objects and reasons says that the effect of the ill effects of sickness in industrial companies was a serious concern not only to the Government but also to the society at large. Therefore, it was found that there is a need to fully utilise the productive industrial assets; afford maximum protection of employment and optimize the use of the funds of the banks and financial institutions and it is imperative to revive and rehabilitate the potentially viable sick industrial companies. Considering Section 20 of the Act it becomes clear that winding up of a company is only resorted to as a last resort and only when it is just and equitable to wind up the sick industrial company - minority creditors and that too some unsecured creditors cannot be permitted to stall the rehabilitation of the sick company by not accepting the scaled down value of its dues. Unless and until there is a sacrifice by all concerned, including the creditors, financial institutions, unsecured creditors, labourers, there shall not be any revival of the sick industrial company / company. The view taken by the High Court of Delhi in Continental Carbon India Ltd. [2012 (7) TMI 980 - DELHI HIGH COURT] that on approval of a scheme by the BIFR under the Sick Industrial Companies (Special Provisions) Act, 1985, the unsecured creditors has an option not to accept the scaling down value of its dues and to wait till the rehabilitation scheme of the sick company has worked itself out with an option to recover the debt with interest post such rehabilitation is erroneous and contrary to the scheme of SICA, 1985 and the same deserves to be quashed and set aside and is accordingly quashed and set aside. 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. Appeal allowed. Issues Involved:1. Whether an unsecured creditor can opt out of the scaled-down value of its dues under a rehabilitation scheme sanctioned by BIFR under SICA, 1985.2. Binding nature of the rehabilitation scheme on unsecured creditors.3. Constitutionality of scaling down unsecured creditors' dues under Article 300A of the Constitution of India.Issue 1: Option for Unsecured Creditors to Opt Out of Scaled-Down DuesThe Supreme Court examined whether an unsecured creditor has the option not to accept the scaled-down value of its dues under a rehabilitation scheme sanctioned by the BIFR under SICA, 1985. The Court held that the scheme sanctioned by BIFR binds all creditors, including unsecured creditors. Allowing unsecured creditors to opt out would frustrate the object and purpose of SICA, 1985, which is to revive sick companies through collective sacrifices by all stakeholders.Issue 2: Binding Nature of the Rehabilitation Scheme on Unsecured CreditorsThe Court emphasized that the rehabilitation scheme under Section 18 of SICA, 1985, is binding on all creditors, including unsecured creditors. The statutory provisions do not require the consent of unsecured creditors for the scheme to be binding. The term 'creditors' in Section 18(8) includes unsecured creditors, and the scheme's binding nature ensures that the revival efforts are not thwarted by minority creditors.Issue 3: Constitutionality under Article 300AThe Court rejected the argument that scaling down the value of unsecured creditors' dues violates Article 300A of the Constitution of India. The scaling down is done under a legally sanctioned rehabilitation scheme, which is binding on all creditors as per the law. Therefore, it does not amount to deprivation of property without authority of law.Conclusion:The Supreme Court quashed the Delhi High Court's judgment in Continental Carbon India Ltd., which allowed unsecured creditors to opt out of the scaled-down value of their dues. The Court held that the rehabilitation scheme under Section 18 of SICA, 1985, binds all creditors, including unsecured creditors, who must accept the scaled-down value of their dues. The Court also upheld the constitutionality of the scheme under Article 300A. Consequently, the appeals were allowed, and the judgments relying on the Delhi High Court's decision were set aside.