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TMI Blog2016 (6) TMI 241X X X X Extracts X X X X X X X X Extracts X X X X ..... al of a scheme by the BIFR under the Sick Industrial Companies (Special Provisions) Act, 1985 (hereinafter referred to as 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 respondent-Company has worked itself out, with an option to recover the debt with interest post such rehabilitation'. The answer was in the affirmative. The facts before the Division Bench were that Continental Carbon had supplied carbon black to Modi Rubber and had dues to be recovered. Settlement eluded the parties. A scheme of rehabilitation of Modi Rubber was approved on April 08, 2008 by BIFR and dues of unsecured creditors were dealt with in para 5.1.3 of the sanctioned schemes. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 1949, and (iii) The Industries Development and Regulation Act, 1951. The Division Bench highlighted that there was no provision in Section 18(2) of SICA for payment to creditors in satisfaction of their claim 'as so reduced' unlike clause (g) in the other three Acts. The Division Bench noted that Section 18(8) of SICA had been amended by the Amendment Act of 1993 to make the scheme binding on the creditors of the sick company. The Division Bench opined that the inference drawn from all this would be that a scheme made under Section 18 of SICA cannot provide for discharge of any encumbrance created by the sick company (except by payment in full) or for reduction or scaling down of its liabilities to the unsecured creditors, except with their consent. The Division Bench kept in mind the objective with which SICA was enacted i.e. public interest underlining the provisions of the SICA to secure the timely detection of a sick and potentially sick companies owning industrial undertaking and for an expert body to take ameliorative steps. The Division Bench highlighted that whilst it may be true that under SICA it is not incumbent for BIFR to obtain consent of unsecured credi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o waived, wholly or in part, the debts due of unsecured creditors without their consent. As an unsecured creditor Sarin International Pvt. Ltd. was aggrieved by the reduction of its dues as an unsecured creditor. The Division Bench upheld the scheme; and qua the unsecured creditors observed, in para 11, as under:- "11. In the case of a Sick Industrial Company where the accumulated losses are more than the net worth, the unsecured creditors and share-holders ordinarily do not get anything in the event of winding up. The question of compensation for deprivation of property could only arise if there is any real property. In these circumstances, the shareholders and creditors can be assumed to have no property in respect of the investment or dues from a sick industrial company whose accumulated losses are more than the net worth." 5. In Oman International Bank case (supra), which has again been noted by the Division Bench and has been distinguished by observing that it was on a different point. The case concerned a situation where one secured creditor refused to give consent to the scheme. The argument was that in such a situation BIFR could not sanction a scheme for the rehabilitati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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 satisfied that the industrial company has become sick, it may also make a reference to the Board; (iv) establishment of Board consisting of experts in various relevant fields with powers to enquire into and determine the incidence of sickness in industrial companies and devise suitable remedial measures through appropriate schemes or other proposals and for proper implementati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, 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 company towards the creditors by adopting a principle which would treat the secured creditors fairly and equally, depending of course on the facts and circumstances of each case. 9. There is yet another reason why we cannot accept the arguments as urged on behalf of the petitioner that a single creditor can prevent BIFR in bringing about a scheme which envisages reduction in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 on. If such complex procedure can be frustrated and set at naught by a single secured creditor, then, what is the purpose and use of enactment of SICA. 10. That the Statement of objects and reasons of SICA ought to be referred to for interpreting the provisions of the Act is clear from various judgments of the Supreme Court including the judgments reported as KSL and Industries Ltd. v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the point was slightly different, the facts were that NSIC holding stake of about 7.76% in the equity of Singer was aggrieved by the reduction in the value of the shares and dilution of the holdings in the sanctioned scheme, and thus no doubt the point was quite different, the reasoning given to repel the argument concerning preventive, ameliorative and remedial measures which could be taken by BIFR, the Division Bench drew the analogy with unsecured creditors and observed as under:- "We are unable to accept the aforesaid plea and once again find no fault with the reasoning contained in the impugned order. Merely because the petitioner is a Government company within the meaning of the Companies Act, which has invested in the share capital of respondent No.1 company, does not imply that the petitioner is covered under Section 19(1) of the SICA. If this submission of the petitioner was to be accepted, then equally an unsecured creditor is making the so-called sacrifice as he would not get the full amount of his dues nor interest. The provisions of Section 19(1) of the SICA are specific as the financial assistance has to be provided by way of loans, advances or guarantees or relie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate level institution or any institution or other authority", the BIFR does not have the authority to bind these entities by its orders and thus modify the obligations and rights owned between the sick company and these entities. However, the scheme for rehabilitation may - in the interests of ensuring that the sick company returns to a profitable state as soon as possible - envisage "financial assistance by way of loans, advances or guarantees or relief's or concessions or sacrifices from" any of the above entities. These provisions in the DRS will not be binding on these entities, unless their consent is obtained. Thus, these entitles - the Railways in this case - may determine whether the concessions envisaged in the DRS will be provided by them and either to consent or reject the provision. If the entity rejects the provision, unlike in the case of the entities covered under Section 18(8), they will not be bound by the scheme sanctioned subsequently. This is made clear by clause 2 of section 19, which states that the DRS is to be circulated in order to obtain consent. Once consent is obtained, however, the provision becomes binding for the period of the sanctioned scheme. C ..... 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