Supreme Court: Rehabilitation Scheme is Binding on all Creditors, Guarantors, and Employees of Sick Company, for whose Revival the Scheme is Sanctioned

Supreme Court: Rehabilitation Scheme is Binding on all Creditors, Guarantors, and Employees of Sick Company, for whose Revival the Scheme is Sanctioned

The Supreme Court by its division bench of Justices M.R. Shah and Sudhanshu Dhulia observed that as per Section 18 of Sick Industrial Companies Act, 1985 (SICA) rehabilitation scheme shall be binding on all the creditors and guarantors and even the employees of the sick company, for whose revival the scheme is sanctioned.

A batch of appeals were taken up together by the Apex Court since they contained common question of law and facts.

A Scheme of Rehabilitation for Modi Rubbers Ltd. (Company) was approved on 8 April, 2008 under the Sick Industrial Companies Act, 1985 (“SICA”). The creditors of the Company were proposed to be paid scaled down values of their dues under the Scheme.

Continental Carbon India Ltd. (“Unsecured Creditor) being an unsecured creditor of the Company was dissatisfied with the scaling down of its dues and therefore filed a writ petition before the High Court.

The High Court had observed that on approval of a scheme by the Board for Industrial and Financial Reconstruction (BIFR) under SICA, the unsecured creditors have an option to not to accept the scaling down value of its dues. By doing so, the unsecured creditors can wait till the rehabilitation scheme works out and later recover their debt with interest once the sick company has revived.

The issue that came for consideration before the Apex Court was whether on approval of a scheme by the BIFR under the Sick Industrial Companies (Special Provisions) Act, 1985, 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?

The bench held that the primary objective of BIFR is the revival of the sick company and to save the sick company from winding up. 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,” the Court observed.

The Apex Court after referring to catena of decisions held by this Court observed that, 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.

Furthermore, the bench asserted that Section 18 of the SICA does not provide that at the time of preparing of the scheme under Section 18 or when it is sanctioned by the Board, the unsecured creditors are required to be heard. The only provision for the consent required is Section 19 and the agency/person, who is required to give the financial assistance, its consent is required.

In this regard, the Court ruled that, once the rehabilitation scheme / scheme under Section 18 prepared by the operating agency is sanctioned by the BIFR, which may include the scaling down the value of dues of the unsecured creditors, the same shall bind all, otherwise the rehabilitation scheme shall not be workable at all and the object and purpose of enactment of the SICA, 1985 will be frustrated.

The Court was of the considered view that if some persons / unsecured creditors and/or even the labourers are permitted to get out of the purview of the scheme and thereafter permitting such or some of the unsecured creditors to wait till the scheme for rehabilitation of the sick company has worked itself out, in that case, the scheme shall not be workable at all.

The Court noted that if a sick company is ordered to be wound up, 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.

The Court emphasized 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 the other company and on the shareholders, creditors, and guarantors and even the employees of the said companies.

The bench discerned, “creditors include unsecured creditors. The submission on behalf of the unsecured creditors that the word ‘creditors’ is not defined like Insolvency and Bankruptcy Code, 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.”

The Court reiterated, that the primary object and purpose of SICA, 1985 is revival of a sick industrial company even by providing rehabilitation scheme under Section 18.

Thus, the bench held that 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.

With respect to the contention of the unsecured creditors that the unsecured creditors should have an option not to accept the scaled down value of its dues and to wait till the scheme for rehabilitation of the sick company has worked itself out, with an option to recover the debt post such rehabilitation was concerned, the Apex Court opined that the same has no substance and cannot be accepted.

The bench highlighted that a company has survived in view of the rehabilitation scheme because of the sacrifice / scaling down the value of the dues of the creditors including the financial institutions. Such a benefit cannot be permitted to the unsecured creditors, who do not accept the scaled down value of its dues. Such an unsecured creditor cannot be permitted to take the benefit of the revival scheme, which is at the cost of other creditors including the financial institutions and even the labourers.

The Court rejected the contention raised by the unsecured creditors that, to compel the unsecured creditors to accept the scaled down value of its dues would tantamount to and would be violative of Article 300A of the Constitution of India.

The bench clarified that the law permits framing of the scheme taking into consideration and to provide the measures contemplated under Section 18, therefore, the rehabilitation scheme which provides for scaling down the value of dues of the creditors /unsecured creditors and even that of the labourers cannot be said to be violative of Article 300A of the Constitution of India.

Lastly, the Apex Court quashed and set aside, the view taken by the High Court of Delhi in Continental Carbon India Ltd. vs. Modi Rubber Ltd., (2012) which had held 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, noting that it was erroneous and contrary to the scheme of SICA, 1985.