Summary
A rehabilitation scheme sanctioned by the BIFR in 2008 for a tyre manufacturer scaled down the dues of unsecured creditors; a supplier refused the reduced amount and the Delhi High Court held that an unsecured creditor may opt out of the scheme and wait until the sick company is rehabilitated to recover its full debt, a view the Madhya Pradesh High Court followed in execution of a decree. The Supreme Court set aside that view: under Section 18(8) of the Sick Industrial Companies (Special Provisions) Act, 1985 a sanctioned scheme binds all creditors, including unsecured creditors and decree-holders; letting minority creditors opt out would make schemes unworkable and could push a revived company back into sickness; and scaling down under statutory authority does not violate Article 300A.
Issues
- Whether, on sanction of a rehabilitation 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 until the scheme has worked itself out so as to recover the full debt with interest after rehabilitation.
Provisions considered
- Section 18, particularly sub-sections (1)(a), (3), (4) and (8), Sick Industrial Companies (Special Provisions) Act, 1985The operating agency prepares and the Board sanctions a scheme for financial reconstruction after publishing the draft for objections; from the date of coming into operation the scheme binds the sick company, its shareholders, creditors, guarantors and employees, and 'creditors' includes unsecured creditors and decree-holders. (¶¶ 11.7, 11.13, 11.14, 11.14.1, 11.14.2, 11.15)
- Sections 19, 22 and 32, Sick Industrial Companies (Special Provisions) Act, 1985Consent is required only from the Government, banks and institutions providing financial assistance under Section 19; Section 22 merely suspends proceedings so that the scheme is not frustrated; and Section 32 gives the Act and the scheme overriding effect over other laws. (¶¶ 11.8, 11.11, 11.14.1)
- Article 300A, Constitution of IndiaScaling down the dues of unsecured creditors under a scheme framed under Section 18 is deprivation by authority of law and is not violative of Article 300A. (¶ 14)
Held
- The Act is a remedial code enacted to secure Article 39 principles and must be given primacy, as held in Tata Motors, Raheja Universal and NGEF; its primary object is revival, with winding up a last resort. Unsecured creditors have no role in preparing the scheme and need not be heard, and once sanctioned the scheme binds all, since otherwise rehabilitation would not be workable; in a winding up unsecured creditors may get nothing, whereas under a scheme they receive part of their dues. (¶¶ 11.6, 11.9, 11.10, 11.14.1, 11.14.2, 11.17)
- Allowing an unsecured creditor to opt out and recover in full after rehabilitation would let minority creditors stall revival, let them take the benefit of sacrifices made by financial institutions and workers without sacrificing themselves, and could render the revived company sick again, frustrating the object of the Act; the Delhi High Court's view in Continental Carbon is erroneous and the scheme binds all creditors, who must accept the scaled down value. (¶¶ 11.16, 11.18, 12, 13, 15)
Result
Civil Appeal No. 375 of 2017 allowed without costs and the Delhi High Court judgment in Continental Carbon India Ltd. set aside; Civil Appeal No. 1755 of 2023 allowed and the Madhya Pradesh High Court order in Civil Revision No. 96 of 2018 quashed; Civil Appeal No. 377 of 2017 dismissed; Civil Appeal No. 379 of 2017 and Transfer Petition No. 543 of 2016 disposed of with W.P.(C) No. 832 of 2016 dismissed; held that a Section 18 scheme binds all creditors including unsecured creditors.