Unsecured creditors

Supreme Court: While exercising its civil appellate jurisdiction, the division bench of M.R Shah* and Sudhanshu Dhulia J.J., while setting aside the impugned order held that the Delhi High Court erred in stating that the unsecured creditors has an option to not 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.

Factual Matrix

In the matter at hand, Modi Rubber Limited (‘appellant’) challenged the impugned judgement passed by the division bench of Delhi High Court and stated that the unsecured creditor Continental Carbon Limited (respondent) has the option to not accept the scaled down value of its dues and may wait till the scheme of rehabilitation of the appellant company which is before the Board for Industrial and Financial Reconstruction (‘BIFR’) under Sick Industrial Companies (Special Provisions) Act, 1985 (‘SICA’) and has worked itself out with an option to recover its debt post such rehabilitation.

The Respondent did not accept the amount offered under the rehabilitation scheme sanctioned under SICA as it was contended that the debts recovered in the scheme due to it were much less than the actual debts.

Legal Trajectory

Respondent 1 preferred an appeal before the Appellate Authority for Industrial and Financial Reconstruction (‘AAIFR’) which was dismissed. The said order was the subject matter of the petition before the High Court which is challenged before the Supreme Court by way of Civil Appeal.

Question of Law

Whether on approval of a scheme by BIFR under 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 has worked itself out, with an option to recover the debt with interest post such rehabilitation?

Court Analysis

The Court while referring to the legislative scheme of SICA, 1985, stated that framers of law felt that the existing institutional arrangements and procedure for revival and rehabilitation of potentially viable sick industrial companies were both inadequate and time consuming. There was a need to enact a legislation to provide for timely determination of the preventive, ameliorative, remedial and other measures that would be needed to be adopted with respect to such companies and for enforcement of the appropriate measures with utmost practicable dispatch. It was imperative to salvage the productive assets and release 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.

The Court stated that SICA was predominantly a remedial enactment as it empowered a quasi-judicial Body- BIFR whose primary concern was to save the sick company from winding up. Section 22 and 22-A of SICA clearly state certain restrictions which will impact upon the implementation of the scheme as well as on the assets of the company example suspension of legal proceedings, contracts etc.

The Court stated that once the rehabilitation scheme or scheme under Section 18 of SICA was prepared by the operating agency and sanctioned by the BIFR, which may include the scaled down value of dues of the unsecured creditors, the same shall bind all, otherwise the rehabilitation scheme would not be workable and the object and purpose of enactment of the SICA, 1985 will be frustrated. To make the company viable, the unsecured creditor would have to sacrifice to some extent otherwise the revival efforts would fail.

The Court stated that, if a sick company was ordered to be wind up, the unsecured creditors would 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 or debts.

As per Section 18(8) of SICA, 1985 sated that the scheme 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.” said the Bench.

Therefore, the Court noted that the intention of the legislature was very clear as creditors included unsecured creditors. The Court disagreed with the submission made on behalf of the unsecured creditors that the word “creditors” was not defined and therefore, the scheme shall not bind the unsecured creditors. 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 otherwise, the object and purpose of rehabilitation scheme shall be frustrated.

The Court perused the statement of objects to the ill effects of sickness in industrial companies which was a serious concern. Therefore, it was found that there was 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, making it imperative to revive and rehabilitate the potentially viable sick industrial companies.

“Thus, minority creditors could not 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.” observed the Bench.

The Court noted that in a given case, because of the scaling down of the value of the dues of the creditors, the company survives because of the sacrifice or scaling down the value of the dues of the creditors including the financial institutions.

The Bench was of the view that the scaling down the value of the dues was under the rehabilitation scheme prepared under Section 18 of the SICA, which has a binding effect on all the creditors. Therefore, the same cannot be said to be violative of Article 300-A of the Constitution of India.

With the said observation, the Court held that the Delhi High Court erred in stating that the unsecured creditors has an option to not 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 thus, it deserves to be quashed and set aside.

[Modi Rubber Limited v Continental Carbon India Limited, 2023 SCC OnLine SC 296, decided on 17-03-2023]

Judgment authored by Justice M.R. Shah

Know Thy Judge | Justice M. R. Shah

Advocates who appeared in this case :

For the appellant- Senior Advocate Jayant Bhushan, Advocate on Record Atishi Dipankar, Advocate A.K. Jain, Advocate Amartya Bhushan, Advocate Ketan Paul, Advocate Tushar Bhushan, Advocate Amartya Bhushan, Senior Advocate Chander Uday Singh, Advocate on Record Uttara Babbar, Advocate Ms. Shipra Jain, Advocate Amjid Maqbool, Advocate Viddusshi, Advocate Zubin Mammen John, Advocate Aman Jha, Advocate Riya Kalra, Senior Advocate Santosh Paul, Advocate E.R. Kumar, Advocate D.P. Mohanty, Advocate Aditya Sharma, Advocate Maithreya Shetty, Advocate Vedant Mishra, Advocate on Record Parekh & Co., Advocate Atul Shanker Mathur, Advocate Shubhankar, Advocate on Record Khaitan & Co. and Advocate on Record Atishi Dipankar;

For the respondents- Advocate on Record P. S. Sudheer, Advocate Rishi Maheshwari, Advocate Anne Mathew, Advocate Bharat Sood, Advocate Shruti Jose, Advocate Kamal Kant, Advocate on Record P. N. Puri, Senior Advocate A.K. Shrivastava, Advocate on Record Akshat Shrivastava, Advocate Satvic Mathur, Senior Advocate Gopal Jain, Advocate Amar Gupta, Advocate Pranav Tanwar, Advocate on Record Divyam Agarwal, Advocate on Record Deepak Goel, Advocate on Record Arun Aggarwal, Advocate Anshika Agarwal, Advocate on Record B. Krishna Prasad, Advocate on Record Mitter & Mitter Co., Advocate Upender Thakur, Advocate Mr. Yatin Grover, Advocate Nandini Tomar, Advocate on Record A. V. Rangam, Advocate Buddy A. Ranganadhan, Advocate on Record M. Yogesh Kanna, Advocate on Record Aparna Bhat, Advocate Karishma Maria, Senior Additional Advocate General Nalin Kohli, Advocate Nimisha Menon, Advocate Aastik Dhingra, Advocate on Record Shuvodeep Roy, Additional Solicitor General Balbir Singh, Senior Advocate Arijit Prasad, Advocate Shahshank Bajpai, Advocate Gargi Khanna, Advocate Manish Pushkarna, Advocate Prashant Singh, Advocate Shyam Gopal, Advocate Preeti Rani, Advocate on Record G.S. Makker, Advocate Prashant Singh II, Advocate on Record Raj Bahadur Yadav and Advocate on Record M.K. Maroria.

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