Rehabilitation Scheme Under SICA Binds All Creditors; Dues Can't Be Recovered Post Revival Of Sick Company : Supreme Court

The Supreme Court has held that the rehabilitation scheme under Section 18 of the SICA, 1985 shall bind all the creditors including the unsecured creditors.

The Bench comprising of Justice M.R. Shah and Justice Sudhanshu Dhulia, while adjudicating an appeal filed in Modi Rubber Limited v Continental Carbon India Ltd., has set aside a High Court which granted liberty to creditors to reject their scaled down dues and claim the same, alongwith interest, once the rehabilitation scheme is implemented and the sick company has revived. The Bench ruled that the recovery of dues post revival of sick company would yet again push the company into sick status.

BACKGROUND FACTS

A Scheme of Rehabilitation for Modi Rubbers Ltd. (“Company/Respondent”) was approved on 08.04.2008 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/Appellant”) 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 held that on approval of a scheme by the 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.

ISSUE

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

SUPREME COURT VERDICT

The Bench opined that under SICA the prime objective of BIFR is revival of sick company and to prevent its winding up. For the same reason, there is no impediment in framing the rehabilitation scheme for pulling out the company from sick status. Further, Section 22 and Section 22A of SICA ensure that the Scheme of Rehabilitation is not frustrated because of certain legal proceeding or unwarranted disposal of the sick company’s assets.

No further recovery of debt once Scheme of Rehabilitation is implemented

The Bench rejected the plea taken by unsecured creditor while holding that the scaling down of dues of the creditors and financial institutions enables the survival of sick company.

It has been observed as under:

“The 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. How such a benefit can be permitted to be given to the unsecured creditors, who does 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.”

As regards the stand taken by the High Court, the Supreme Court has ruled that if creditors have an option to recover their remaining dues with interest after the rehabilitation scheme has worked out, then the same would again push the revived company into sick status. It has been observed as under:

“Now, so far as the view taken by the High Court that the unsecured creditor had an option not to accept the scaled down value of its dues and can wait till the scheme for rehabilitation of the company has worked itself out with an option to recover the debt with interest post such rehabilitation is accepted, in a given case, the sick company, which has been able to revive because of the scaling down the value of the dues, may again become sick, if the entire dues of the unsecured creditors are to be paid thereafter.”

No violation of Article 300A of Constitution

The Bench has declined to accept the plea that compelling unsecured creditors to accept the scaled down value of their dues would be violative of Article 300A of the Constitution of India. It was observed that the rehabilitation scheme is prepared under Section 18 of SICA, which has a binding effect on all the creditors.

The Bench has been set aside the High Court’s Order, while holding that the rehabilitation scheme under Section 18 of the SICA shall bind all the creditors and the unsecured creditors have to accept the scaled down value of its dues provided under the rehabilitation scheme.

Case Title: Modi Rubber Limited v Continental Carbon India Ltd

Citation: 2023 LiveLaw (SC) 208

Counsel for Appellant: Shri Jayant Bhushan (Senior Advocate).

Counsel for Respondent: Shri P.S. Sudheer, Advocate.

 Sick Industrial Companies Act, 1985- the rehabilitation scheme under Section 18 of the SICA, 1985 shall bind all the creditors including the unsecured creditors-dues cannot be recovered post revival of sick company- compelling unsecured creditors to accept the scaled down value of their dues would not be violative of Article 300A of the Constitution of India. It was observed that the rehabilitation scheme is prepared under Section 18 of SICA, which has a binding effect on all the creditors.

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