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TMI Blog2012 (7) TMI 980X X X X Extracts X X X X X X X X Extracts X X X X ..... raw material suppliers, acceptances, dealers and C F and inter-corporate deposits. The unsecured creditors could exercise one of the three options: a. To accept 30% of the principal outstanding as full and final payment. The payment shall be made within 3 months of the sanction of the scheme by the BIFR; or b. To accept 40% of the principal outstanding as full and final payment. The payment shall be made in 3 equal installments from the cut off date (i.e. 31.3.2008). The first installment shall be payable within 3 months of the sanction of the Scheme by the BIFR; or c. To accept 50% of the principal outstanding as full and final payment. The payment shall be made in one go at the end of 3rd year from the sanction of the Scheme. 3. After incorporating the three options, the aspects of dues to raw material suppliers has been dealt with in the following words: Raw-material Suppliers: MRL has already entered into Memorandum of Understanding with 30 Suppliers out of total 36 Pressing Raw Material suppliers. They have accepted for payment as per option (a). Discussions with others are underway by the company management. 4. The petitioner is a carbon black supplier ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cular class is considered and the consent of majority of the creditors of that class constituting more than 3/4th of the value of the debt is required to be obtained. Except one creditor all had accepted the terms/payment and quantum of sacrifice and, thus, it was observed that this majority view should prevail especially as the scheme is more advantageous to safeguard the interests of the creditors rather than the winding up option. In case of winding up under the provisions of Section 529A of the Companies Act the unsecured creditors would receive a priority lower than the secured creditors and, thus, the chances of receiving their amounts is highly remote. Section 19 (1) (2) of the SICA were resorted to, to indicate that any relief or concession that may be required of an unsecured creditor does not require any prior approval or consent. 8. The AAIFR, thus, concluded that in view of the three options given in the present case to the unsecured creditors, they cannot be allowed to put the entire sanctioned scheme of revival of the respondent-Company in jeopardy. Since it was not a case where the petitioner was required to give any financial assistance, Section 19 (1) of the S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rguments on the legal issue on two different claims. The first was that the denial of full price and compelling the petitioner to accept a lesser amount would tantamount to taking away the right to property in the goods without appropriate consideration and would be violative of Article 300A of the Constitution of India. The second claim was that the scheme of the SICA provides for preparation and sanction of the scheme for rehabilitation under Section 18 of the SICA. Sub-clause (e) of sub-section (1) of Section 18 of the SICA provides for preventive, ameliorative and remedial measures as may be appropriate, while Section 19 of the SICA deals with rehabilitation by giving financial assistance qua such preventive, ameliorative and remedial measures. It was the submission of the learned counsel that the same would apply to a class of creditors which did not include unsecured creditors like the petitioner and, thus, there was no specific provision in the SICA which authorized the BIFR to deprive the petitioner of its full value of unsecured debt. Section 22 of the SICA was also referred to in the context of suspending legal proceedings, contracts, etc. In order to buttress his submiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... off under a revival scheme framed under Section 18 of the SICA. Even in case of secured creditors it has been held that a single secured creditor cannot be permitted to frustrate the revival scheme with 3/4th or more of the secured creditors in value having agreed to the scheme [Oman International Bank SAOG Vs. AAIFR 169 (2010) DLT 618 (DB)]. The petitioner is alleged to be constituting only 8.14 per cent of the unsecured debt. It was an insignificant part, i.e., 2.9 per cent of the total debt. Even if the debt owed to suppliers of raw material as a class was taken, the debt of the petitioner was stated to be 23.95 per cent of the total debt owed to the suppliers. It was contended that the intention of the legislature has to be derived from the words of the statute and if the legislature intended to include unsecured creditors within the ambit of the persons from whom the consent is required, it would have stated so. The scheme once approved was pleaded to be binding with no option to the petitioner to sit outside and wait till the respondent-Company is rehabilitated to claim the full debt. A contrary view would, thus, entitle any unsecured creditor to stand outside the revival sc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was, thus, held that there could not be any unilateral appropriation of the insurance amount by the petitioner bank leaving the other bank high and dry in an unequal bargaining position in case rehabilitation scheme was to be propounded and the secured creditors are liable to be treated at par. 17. Tata Motors Ltd. Vs. Pharmaceutical Products of India Ltd. Anr. (2008) 7 SCC 619 was referred to for the purposes of advancing the submission that the provisions of SICA would prevail over the provisions of the Companies Act. The petitioner therein was an unsecured creditor and the scheme enlisted only a select few creditors (secured unsecured) as a result of which a large number of creditors had to be excluded including the Appellant. 18. In Lords Chloro Alkali Limited case (supra) it was held that Section 19 (1) of the SICA deals only with provision made for financial assistance by way of loans, advances or guarantees or reliefs or concessions or sacrifices from relevant entities. Thus, the financial assistance under the said sub-section of the SICA has to be of this kind to avail of the benefit of Section 19 (2) of the SICA and unpaid price of goods supplied would not fall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quiry under section 16 is pending or any scheme referred to in section 17 is under preparation or during the period of consideration of any scheme under section 18 or where any such scheme is sanctioned there under, for due implementation of the scheme, the Board may by order declare with respect to the sick industrial company concerned that the operation of all or any of the contracts, assurances of property, agreements, settlements, awards, standing orders or other instruments in force, to which such sick industrial company is a party or which may be applicable to such sick industrial company immediately before the date of such order, shall remain suspended or that all or any of the rights, privileges, obligations and liabilities accruing or arising there under before the said date, shall remain suspended or shall be enforceable with such adaptations and in such manner as may be specified by the Board: Provided that such declaration shall not be made for a period exceeding, two years which may be extended by one year at a time so, however, that the total period shall not exceed seven years in the aggregate. (4) Any declaration made under sub-section (3) with respect to a si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rocedure)‟ 2nd Edition, 1999 by S.A. Naik, second edition, while examining the scope of Section 18 (2) of the SICA it has been observed that in view of clauses (a) to (l) there are certain matters beyond the reach of the scheme which include: (1) Liquidation of any encumbrance of the sick company, except by satisfaction. (2) Reduction or scaling down of the liabilities of the sick company, without the consent of the concerned creditors. (3) Abatement of any action or legal proceeding pending against the sick company. (4) Compulsory conversion of any debentures issued or loans raised by the sick company into shares of that company for allotment to such debenture holders or lenders. (5) Compulsory discontinuance of the services of any executives or employees of the sick company. (6) Sale or lease of any other undertaking of the sick company, that is to say, other than its industrial undertaking; and (7) Sale of any other assets of the sick company, that is to say, other than the assets pertaining to its industrial undertaking. 24. The learned author notes at page 185, note 18.10, the rational as to why it cannot so provide. The word liabilities‟ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not available then the company may apply to BIFR for suspension of the relative contract of deposit under Section 22 (3) of the SICA during the period of implementation of the scheme subject to a maximum of seven (7) years which in turn would suspend the legal remedy of such depositor to recover the dues as provided in Section 22(4). 28. However, simultaneously in Note 18.12 while discussing the legal position of creditors, there are observations to the effect that the aforesaid position has perhaps undergone a change with the 1993 amendment of sub-section 8 of Section 18 of the SICA which makes the scheme binding on creditors, which reads as under: 18. Preparation and sanction of Schemes. .... .... .... .... .... .... .... .... .... .... (8) 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 as the case may be, the other company and also on the shareholders, creditors and guarantors and employees of the said companies. The learned author observes that there has been simultaneous amendment of sub-section (3) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount owed under contracts. Section 18 of the SICA prescribes for one or more measures specified therein to be adopted. However, there is no provision made for a reduction or scaling down the liability of a sick company without the consent of the concerned creditor(s) though the legal proceedings against the company are kept at bay. The provisions of Section 18 (8) of the SICA, thus, providing for a scheme to be binding on the creditors of a sick company has to be read along with other provisions and is, thus, based on a consent being obtained under the usual legal procedure. There can, thus, be deferred payment or part payment with consent of the creditors. The mandate of BIFR is not to ensure that once the scheme has worked itself out, the company has to become debt free. BIFR is, therefore, under no obligation under the law, and has no authority to mandatorily wipe out the debt owed to unsecured creditors, unless they consent to it. 30. A situation may, thus, ensue, as in the present case, where a creditor for its best interest is unwilling to join in the scheme of rehabilitation, conscious of the fact that if there is no rehabilitation and the net worth of the company is wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count of the fact that the net worth of the company has become positive. 34. The AAIFR has failed to appreciate the distinction between the absence of requirement of consent of an unsecured creditor and compelling an unsecured creditor to write off a part of its dues overriding the provisions of the contract. The absence of the provisions in SICA are qua both the issues but they are separate from each other. Thus, what the petitioner cannot do is to block the scheme which even a secured creditor cannot do, if 3/4th or more of the secured creditors agree to the scheme [Ref: Oman International Bank SAOG case (supra)]. 35. Reference to Section 391 of the Companies Act, to our mind, is of no avail for the respondents. Section 391 of the Companies Act envisages the convening and holding of meetings of different class of creditors of the company wherein they decide whether, or not, to accept the propounded scheme for compromise or arrangement. The BIFR does not follow any such procedure. There is no collective application of mind by the creditors of a particular class, and no collective decision by at least 75% of the creditors of a particular class (in terms of value), in the pres ..... X X X X Extracts X X X X X X X X Extracts X X X X
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