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2016 (6) TMI 241 - DELHI HIGH COURT

2016 (6) TMI 241 - DELHI HIGH COURT - TMI - Approval of a scheme by the BIFR under the Sick Industrial Companies (Special Provisions) Act, 1985 - whether 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-Company has worked itself out, with an option to recover the debt with interest post such rehabilitation'? - Whether the decision of Continental Carbon India Ltd. Vs. Modi Rubber Ltd. reached the .....

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rd to sanction a scheme. Those creditors which have to provide financial assistance would form a sub-category and their consent alone would be necessary with respect to the financial assistance to be provided.

We are therefore of the opinion that prima-facie case is made out to refer the matter to a Larger Bench on the following questions:- Whether the decision in Modi Rubber case has not properly appreciated the mandate and scope of Section 18 of the Sick Industrial Companies (Specia .....

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. MUKTA GUPTA JJ. For the Appellant: Mr. Rajeeve Mehra, Sr.Advocate instructed by Mr.Amar Gupta, Ms.Ritika Gambhir, Mr.Divyam Agarwal and Ms.Shruti, Advocates For the Respondent: Mr. K.N. Bhat, Sr. Advocate instructed by Mr. D.P. Mohanty, Mr.Aditya Sharma and Ms.Nandita Bajpai, Advocates for R-1 Mr.Nitin Gupta, Advocate for R-2 Ms.Rekha Palli, Sr. Advocate instructed by Ms. Punam Singh and Ms. Shruti Munjal, Advocates for R-3 to R-9 PRADEEP NANDRAJOG, J.

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9;Whether on approval of a scheme by the BIFR under the Sick Industrial Companies (Special Provisions) Act, 1985 (hereinafter referred to as the '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-Company has worked itself out, with an option to recover the debt with interest post such rehabilitation'. The answer was in the affirmative. The facts before the Division .....

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onths of the sanction of the scheme by the BIFR; or (b) To accept 40% of the principal outstanding as full and final payment. The payment shall be made in 3 equal installments from the cut off date (i.e. 31.3.2008). The first installment shall be payable within 3 months of the sanction of the Scheme by the BIFR; or (c) To accept 50% of the principal outstanding as full and final payment. The payment shall be made in one go at the end of 3rd year from the sanction of the Sc .....

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Bench of this Court reported as 181 (2011) DLT 46 (DB) Lord Chloro Alkali Ltd. Vs. Bharat Heavy Electrical Ltd. & Anr., but held that BIFR retains jurisdiction over a company declared sick till the end of rehabilitation period envisaged in the scheme in terms of provisions of Section 18(2) and 18 (9) of SICA, 1985 holding that the law declared by Division Benches of this Court and the Supreme Court in the decisions reported as (2010) 103 SCL 385 (Delhi) National Small Industries Corporation .....

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a sick company. The Division Bench noted Section 18 (2) of SICA, 1985 and the commentary 'The Law of Sick Industrial Companies (Law Practice and Procedure) 2nd Edition, 1999 by S.A.Naik to highlight that the word 'liabilities' does not appear in clause (a) of Section 18(2) of SICA and that the omission was neither unintentional nor accidental. The Division Bench noted that even clause (f) of Section 18(2) of SICA does not refer to reduction of interest or rights of credi .....

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three Acts. The Division Bench noted that Section 18(8) of SICA had been amended by the Amendment Act of 1993 to make the scheme binding on the creditors of the sick company. The Division Bench opined that the inference drawn from all this would be that a scheme made under Section 18 of SICA cannot provide for discharge of any encumbrance created by the sick company (except by payment in full) or for reduction or scaling down of its liabilities to the unsecured creditors, except with their cons .....

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that there was no provision in SICA to compel unsecured creditors to provide concession. The Division Bench found no quarrel with the proposition that BIFR retains jurisdiction over a sick company in terms of sub-Sections (9) and (12) of Section 18 of SICA till the end of the rehabilitation period as envisaged in the scheme, but opined that there was a distinction between the absence of the requirement of consent by an unsecured creditor and compelling an unsecured creditor to write off a part .....

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owing words : We are unequivocally of the view that the contract inter se the parties arrived at whereafter the company has become sick cannot be compulsorily overridden by the provisions of the SICA if the creditor is willing to wait till such time as the company is financially rehabilitated to claim its dues. There would be only suspension of legal proceedings as envisaged under Section 22 of the SICA. In fact, it is only such an interpretation which could give meaning to Section 22 .....

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noted by the Division Bench is 1996 (39) DRJ 380 Sarin International Pvt.Ltd. vs. AAIFR. In said case, the scheme for rehabilitation pertained to revival of the company M/s Stallion Shox Ltd. It was promoted by one Ajeet Sarin who had also promoted Sarin International Pvt. Ltd. The sanction scheme not only reduced the share capital of the existing shareholders but also waived, wholly or in part, the debts due of unsecured creditors without their consent. As an unsecured creditor Sarin Internati .....

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perty. In these circumstances, the shareholders and creditors can be assumed to have no property in respect of the investment or dues from a sick industrial company whose accumulated losses are more than the net worth. 5. In Oman International Bank case (supra), which has again been noted by the Division Bench and has been distinguished by observing that it was on a different point. The case concerned a situation where one secured creditor refused to give consent to the scheme. The a .....

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ffects 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. The concern of the Government is accentuated by the alarming increase in the incidence of sickness in industrial companies. It has been recognized that in order to fully utilize the productive industrial assets, afford .....

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een the experience that the existing institutional arrangements and procedures for revival and rehabilitation of potentially viable sick industrial companies are both inadequate and time-consuming. A multiplicity of laws and agencies makes the adoption of coordinated approach for dealing with sick industrial companies difficult. A need has, therefore, been felt to enact in public interest a legislation to provide for timely determination by a body of experts of the preventive, ameliorative, reme .....

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wever be brought within the ambit of the legislation in due course; (ii) identification of sickness in an industrial company, registered for not less than seven years, on the basis of the symptomatic indices of cash losses for two consecutive financial years and accumulated losses equaling or exceeding the net worth of the company as at the end of the second financial year; (iii) the onus of reporting sickness and impending sickness at the stage of erosion of fifty per ce .....

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ablishment of Board consisting of experts in various relevant fields with powers to enquire into and determine the incidence of sickness in industrial companies and devise suitable remedial measures through appropriate schemes or other proposals and for proper implementation thereof; (v) constitution of an Appellate Authority consisting of persons who are or have been Supreme Court Judges, senior High Court Judges and Secretaries to the Government of India, etc., for hearing appeals .....

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ial companies. When we read the aforesaid Statement of objects and reasons alongwith Section 20 of the Act, it becomes clear that winding up of a company is to be resorted to only as a last eventuality and only when it becomes just and equitable to wind up the sick industrial company. That the proposition as was very vehemently canvassed on behalf of the petitioner has no legs to stand upon becomes clear also from the expression "one or more" as found in Section 18 of the Act. The expr .....

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tion 18 so as to further the object of the Act. There cannot be a reading of the provisions of Section 19(1) and 19(4) of the Act in the manner as is suggested by the learned senior counsel for the petitioner further becomes abundantly clear when we read Section 18(3)(b) of the Act along with the expression "the Board may adopt such other measures" as found in Section 19(4). In our opinion, this expression "the Board may adopt such other measures" cannot be restricted to only .....

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, however, the same cannot mean that the objections can prevent the drawing up and implementation of a sanctioned scheme by an obdurate minority secured creditor. In fact, we must point out that a company becomes sick only because its net worth is eroded and it is unable to pay its creditors and when we talk of revival and rehabilitation of sick company as a first step and measure ordinarily and in a vast majority of cases, at the outset, BIFR has necessarily to bring about a composition between .....

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mpany to its secured creditors. This additional reason is the amendment which has been brought about to SICA by Section 41 and schedule of the Act 54 of 2002 which amended Section 15 of SICA after promulgation of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. As a result of this amendment, a third proviso has been brought about in sub Section (1) of Section 15 that the secured creditors who represent not less than 3/4th in the value of t .....

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less than three-fourth in value of the amount outstanding against financial assistance disbursed to the borrower of such secured creditors, have taken any measures to recover their secured debut under Sub-section(4) of Section 13 of that Act A plain reading of this proviso added by the Act 54 of 2002 shows that the consent of at least 3/4th of the secured creditors is necessary for the proceedings before BIFR to abate. This proviso further brings into focus the legislative intent th .....

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k industrial company is always the heart and basic structure of any scheme for revival and rehabilitation of a sick industrial company. After all, if no financial concession in the form of reduction of dues payable by a sick company to its creditors is given, then, what will be the use of other measures under Section 18 such as change of management or sale/lease of assets of a sick company and so on. None of these other measures would in themselves help in rehabilitation and revival of the sick .....

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vival of a sick industrial company is a complex process involving discussions with secured creditors, other creditors, labour and other personnel employed with the company, dues of the revenue authorities and so on. If such complex procedure can be frustrated and set at naught by a single secured creditor, then, what is the purpose and use of enactment of SICA. 10. That the Statement of objects and reasons of SICA ought to be referred to for interpreting the provisions of the Act is .....

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n when a company is not sick and proceedings are resorted to by the company under Section 391 - 394 of the Companies Act, 1956 to ring about a composition and settlement with its creditors, it is the majority of the secured creditors who do prevail, meaning thereby minority secured creditors cannot frustrate a scheme which is propounded by the majority of the secured creditors. If a minority secured creditor cannot frustrate a scheme of composition under Section 391 - 394 of the Companies Act, 1 .....

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for imposition of a valid statutory settlement which forms part of a sanctioned scheme. The second aspect is that by virtue of Section 529-A of the Companies Act, the dues of the workers are to be treated as equal to the dues payable to a secured creditor. Therefore, dues of even one of the workers can be in a manner of speaking be said to be the dues claimed by a secured creditor, but can it be contended that one worker can frustrate a rehabilitation and revival scheme as proposed by BIFR afte .....

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tinguished, on the reasoning that the point was slightly different, the facts were that NSIC holding stake of about 7.76% in the equity of Singer was aggrieved by the reduction in the value of the shares and dilution of the holdings in the sanctioned scheme, and thus no doubt the point was quite different, the reasoning given to repel the argument concerning preventive, ameliorative and remedial measures which could be taken by BIFR, the Division Bench drew the analogy with unsecured creditors a .....

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g the so-called sacrifice as he would not get the full amount of his dues nor interest. The provisions of Section 19(1) of the SICA are specific as the financial assistance has to be provided by way of loans, advances or guarantees or reliefs or concessions or sacrifices. The present case is one only of dilution of shareholding of the petitioner in respondent No.1 company. 7. Relying upon the decision in Sarin International case (supra), in WP(C) 8154/2010, M/s OCL India Ltd. vs. M/s .....

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BHEL a Government company was an unsecured creditor and contention by it on the reasoning that its consent was necessary because it was an other authority within the meaning of Section 19(1) of SICA was repelled on the reasoning that the other authority contemplated was a public financial institution. The other contention that being an unsecured creditor the scheme could not be sanctioned without its consent because its dues were scaled down was noted and rejected, but we find sans any reasoning .....

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second which related to clause 11.6 binding railways, as under:- As regards the first two questions, the court notes that the provisions of Sections 18 and 19 are complementary, and dealing with different spheres of action. Section 18(8) states that the scheme sanctioned by the BIFR will be binding on the sick company, its creditors, employees, guarantors, etc. Indeed, these are the only entities which the BIFR can unilaterally bind. The scope of application of Section 19, however, i .....

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to a profitable state as soon as possible - envisage financial assistance by way of loans, advances or guarantees or relief's or concessions or sacrifices from any of the above entities. These provisions in the DRS will not be binding on these entities, unless their consent is obtained. Thus, these entitles - the Railways in this case - may determine whether the concessions envisaged in the DRS will be provided by them and either to consent or reject the provision. If the entity rejects the .....

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