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TMI Blog2010 (5) TMI 382X X X X Extracts X X X X X X X X Extracts X X X X ..... d under section 19(1) of the Act. Putting it differently, it is contended that though majority of the secured creditors agree for financial assistance in the form of concessions to be granted to a sick industrial company for the purpose of revival and rehabilitation of the sick company, yet, such majority secured creditors can be overridden by a minority secured creditor who refuses to give consent to a scheme which involves financial assistance in the form of concessions and reduction of the dues of a sick industrial company to its secured creditors. 2. To appreciate the question involved, before proceeding ahead, it is necessary to refer to certain provisions of SICA which are as under: "15. Reference to Board.-(1) Where an industrial company has become a sick industrial company, the Board of Directors of the company, shall, within sixty days from the date of finalisation of the duly audited accounts of the company for the financial year as at the end of which the company has become a sick industrial company, make a reference to the Board for determination of the measures which shall be adopted with respect to the company: Provided that if the Board of Directors had sufficient ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall, after considering all the relevant facts and circumstances of the case, decide, as soon as may be by order in writing, whether it is practicable for the company to make its net worth exceed the accumulated losses within a reasonable time. (2) If the Board decides under sub-section (1) that it is practicable for a sick industrial company to make its net worth exceed the accumulated losses within a reasonable time, the Board, shall, by order in writing and subject to such restrictions or conditions as may be specified in the order, give such time to the company as it may deem fit to make its net worth exceed the accumulated losses. (3) If the Board decides under sub-section (1) that it is not practicable for a sick industrial company to make its net worth exceed the accumulated losses within a reasonable time and that it is necessary or expedient in the public interest to adopt all or any of the measures specified in section 18 in relation to the said company it may, as soon as may be, by order in writing, direct any operating agency specified in the order to prepare, having regard to such guidelines as may be specified in the order, a scheme providing for such measures in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , if any, within such period as the Board may specify. (b )The Board may make such modifications, if any, in the draft scheme as it may consider necessary in the light of the suggestions and objections received from the sick industrial company and the operating agency and also from the transferee industrial company and any other company concerned in the amalgamation and from any shareholder or any creditors or employees of such companies. ........... Section 18(4) The scheme shall thereafter be sanctioned as soon as may be, by the Board (hereinafter referred to as the 'sanctioned scheme') and shall come into force on such date as the Board may specify in this behalf: Provided that different dates may be specified for different provisions of the scheme." .......... "Section 19. Rehabilitation by giving financial assistance 19. Rehabilitation by giving financial assistance.-(1) Where the scheme relates to preventive, ameliorative, remedial and other measures with respect to any sick industrial company, the scheme may provide for financial assistance by way of loans, advances or guarantees or reliefs or concessions or sacrifices from the Central Government, a State Government, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not likely to make its net worth exceed the accumulated losses within a reasonable time while meeting all its financial obligations and that the company as a result thereof is not likely to become viable in future and that it is just and equitable that the company should be wound up, it may record and forward its opinion to the concerned High Court." 3. The facts of the case are that the petitioner advanced credit facilities for working capital to the now sick company-respondent No. 2 against hypothecation of its stocks/receivables. On account of default of the sick company to make the payment of the dues of the petitioner, in spite of a one time settlement agreement, the petitioner issued winding up notices to the sick company, however, the company could not initiate recovery proceedings as respondent No. 2 was a sick company. BIFR appointed IFCI as the operating agency which prepared a draft scheme for the revival of the sick company. BIFR chose to revive the company on the basis of the reconstruction scheme. Before ordering of approval of the draft scheme (DRS), the secured creditors had a detailed joint meeting on 16-1-2006 for considering the DRS before it was submitted to B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jority of secured creditors accounting for more than 75 per cent of secured debt have accepted OTS, a similar dispensation should be provided to the remaining secured creditors.' We do not agree that the disagreement of a bank which has a small share, i.e., about 7.23 per cent of the total outstanding debt, can be or should be allowed to come in the way of revival of a sick company which has nearly 4000 workers including nearly 1200 at Mohali." 5. Before us, it has been contended by Sh. Adarsh B. Dial, Senior Advocate, on behalf of the petitioner, that the language of section 19(1) and section 19(4) cannot but lead to the irresistible conclusion that once consent is refused even by one of the secured creditors, then, the Board for Industrial and Financial Reconstruction (BIFR or Board) can only adopt any other measures under section 18 except the measure of forcing a secured creditor to bring about a reduction in his claims against the sick company. 6. At the first blush, the argument as raised by the learned senior counsel on behalf of the petitioner appears to have a basis, however, once we see the provisions of section 19(1) and section 19(4) in their context in the scheme of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate with utmost practicable dispatch. The salient features of the Bill are- (i )application of the legislation to the industries specified in the Final Schedule to the Industries (Development and Regulation) Act, 1951, with the initial exception of the scheduled industry relating to ships and other vessels drawn by power, which may however 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 cent or more of the net worth of an industrial company is being laid on the Board of Directors of such company; where the Central Government or the Reserve Bank is satisfied that an industrial company has become sick, it may make a reference to the Board, likewise if any State Government, scheduled bank or public financial institution having an interest in an industrial company is sat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 19(4). In our opinion, this expression "the Board may adopt such other measures" cannot be restricted to only measures other than those prescribed under section 18(1)(a) and 18(1)( e) of the Act. Section 18(3)(b) states categorically that the Board would make modification to a scheme of revival and rehabilitation of a company in case of any objection from a creditor, therefore, a conjoint reading of section 18(3)(b), section 19(1) and section 19(4) shows that the other measures which are talked of in section 19(4) would be the modification of a scheme in the light of the objections of a secured creditor, 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 the creditors by bringing about reduction of their claims and dues of the sick co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndustrial 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 industrial company and which measures could have been adopted by the sick company without being a sick company governed by SICA. It is for this reason that the Legislature has advisedly and intentionally used the expression "one or more" as found in section 18, and which aspect we have already adverted to above that the Board may take one or more measures, i.e., it is not confined only to one measure of refusing financial assistance by means of concession to a sick industrial company. Revival 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Therefore, in our opinion, a minority creditor or any minority group cannot frustrate the majority by putting a spoke in the wheel by objecting to the sanction of a rehabilitation and revival scheme of a sick industrial company so as to cause the frustration in the object of revival of a sick company. 12. The reliance placed by the senior counsel for the petitioner on the judgment of the Division Bench of Bombay High Court in the case of Ashok Organic Industries Ltd., In re [2008] 144 Comp. Cas. 144 is misplaced. The judgment in Ashok Organic Industries Ltd.'s case (supra) came to be passed on a reference to decide the issue as under : "Whether an Industrial Company which has made a reference under section 15 of Sick Industrial Companies Act, can during the pendency of such reference, apply to this Court for sanctioning a scheme of arrangement or compromise with its creditors and shareholders and whether this Court can take cognizance of such an application during the pendency of the reference and pass necessary orders thereon as are permissible in law ?" (p. 150) It was held in that judgment that provisions of SICA will prevail over sections 391 and 394 of the Companies Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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