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TMI BlogTHE REHABILITATION SCHEME UNDER SECTION 18 OF SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT, 1985 SHALL BIND ALL THE CREDITORS INCLULDING THE UNSECURED CREDITORSX X X X Extracts X X X X X X X X Extracts X X X X ..... THE REHABILITATION SCHEME UNDER SECTION 18 OF SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT, 1985 SHALL BIND ALL THE CREDITORS INCLULDING THE UNSECURED CREDITORS - By: - Mr. M. GOVINDARAJAN - Other Topics - Dated:- 25-4-2023 - - The Sick Industrial Companies (Special Provisions) Act, 1985 ( Act for short) was enacted in India to make in the public interest, special provisions, with a view to securing the timely detection of sick and potentially sick companies owning industrial undertakings, the speedy determination by a Board of experts of the preventive, ameliorative, remedial and other measures which need to be taken with respect to such companies and the expeditious enforcement of the measures so determined and for matters con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nected therewith or incidental thereto. The Central Government established the Board for Industrial and Financial Reconstruction ( BIFR for short) and also appellate authority for the purposes of this Act. Section 15 of the Act provides that where an industrial company has become a sick industrial company, the Board of Directors of the Company, shall within 60 days from the date of finalization 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 BIFR for determination of the measures which shall be adopted with respect to that company. Section 16 of the Act provides that the Board may make such inquiry as it may deem fit for d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etermining whether any industrial company has become a sick industrial company. The Board may, for this purpose, order any operating agency to enquire into and make a report with respect to such matters as may be specified in the order. On completion of the inquiry, if the Board is satisfied that a company has become a sick industrial company, the Board shall consider whether it is practicable for the company to make its net worth exceed the accumulated losses within a reasonable time. Or the Board may, by order, direct any operating agency to prepare a scheme for the revival of the company. The operating agency shall, within a period of 90 days from the date of order, prepare a scheme with respect to such company providing for any o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne or more of the measures described under section 18. The scheme prepared by the operating agency shall be examined by the Board and a copy of the same with modification if any in draft to the sick industrial company and the operating agency. Section 19 provides that where the scheme relates to preventive, ameliorative, remedial and other measures the scheme may provide for financial assistance by way of loans etc. If the sick industrial company cannot be revived the Board may order for winding up of the sick industrial company. The Board may record and forward its opinion to the High Court for proceeding with the winding up process of the sick industrial company. The scheme will aim for the revival of the company. In the scheme i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t will not be expected that all the creditors would get refund of the entire dues. There may be hair cut. Once the scheme is approved the scheme is binding on all creditors whether secured creditors or unsecured creditors. No creditor can get the full amount from the rehabilitation scheme. Since the scheme is binding on all creditors any creditor either secured or unsecured cannot come out from the scheme. In MODI RUBBER LIMITED VERSUS CONTINENTAL CARBON INDIA LTD., OCL INDIA LIMITED VERSUS ANDREW YULE CO. LTD. ORS., TVS SEWING NEEDLES LTD. VERSUS SINGER INDIA LTD. ORS. AND M/S. TITAGARH WAGONS LIMITED VERSUS M/S. AMAR FORGING PVT. LTD. ORS. - 2023 (3) TMI 828 - SUPREME COURT with four connected appeals decided by Supre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me Court on 17.03.2023, a common judgment was passed by Supreme Court. The facts in all five cases are similar and it need not be discussed in detail of each case. The core issue arose in all five cases is whether on approval of a scheme by the under the Act, 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 unsecured creditors in these cases submitted before the Supreme Court that the unsecured creditors should have an option not to accept the scaled down value of its dues and to wait till the scheme for rehabilitation of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sick company has worked out. The Supreme Court did not accept the option of unsecured creditors to recover the debt post rehabilitation of the company. The Supreme Court observed because of scaling down of the values of the dues of the creditors the company survives. The creditors including financial institutions sacrificed for the survival of the sick company by scaling down the value of their dues. The Supreme Court also observed that how such a benefit can be permitted to be given to the unsecured creditors, who do not accept the scaled down value of its dues. Such an unsecured creditors cannot be permitted to take the benefit of the revival scheme, which is at the cost of other creditors including the financial institutions and ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the laborers. The Supreme Court analyzed the judgment of High Court against which the present appeals have been filed before the Supreme Court. The High Court held that the unsecured creditor had an option not to accept the scaled down value of its dues and can wait till the scheme of rehabilitation of the company has worked itself out with an option to recover the dues of the unsecured creditors with interest post such rehabilitation is accepted. The Supreme Court observed that the sick company would be able to survive because of the scaling down the value of the dues of the creditors. If the request of the unsecured creditors is accepted the company in question may again become sick if the entire dues of the creditors are paid po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st rehabilitation. If such a thing is permitted it will again frustrate the object and purpose of the Act. The unsecured creditors submitted before the Supreme Court that compelling the unsecured creditors to accept the scaled down value of its dues would be tantamount to and would be violative of the Article 300A of the Constitution of India . The Supreme Court considered as not having any substance. The Supreme Court observed that the scaling down the value of the dues under the rehabilitation scheme prepared under section 18 of the Act has a binding effect on all of the creditors. Therefore it cannot be said that it is violative of Article 300A of the Constitution of India . The Act permits framing the scheme taking int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o consideration and to provide the measures contemplated under section 18, therefore, the rehabilitation scheme which provides for scaling down the value of the dues of the creditors either secured or unsecured and even that of the laborers cannot be said to be violative of Article 300A of the Constitution of India . Therefore the contention of the unsecured creditors is not tenable. The Supreme Court held that for the reasons discussed above the view taken by the High Court of Delhi in Continental Carbon India Limited that on approval of a scheme by BIFR under the Act the unsecured creditors has an option not to accept the scaling down value of its dues and to wait till the rehabilitation scheme of the sick company has worked itself ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out with an option to recover the debt with interest post such rehabilitation is erroneous and contrary to the scheme of the Act. Therefore the judgment of High Court deserves to be quashed and set aside. The Supreme Court held that the rehabilitation scheme under section 18 of the Act shall bind all the creditors including the unsecured creditors and the unsecured creditors have to accept the scaled down value of its dues provided under the rehabilitation scheme. Now the Act has been repealed by the Sick Industrial Companies (Special Provisions) Act, 2003 which came into effect from 25.11.2016. The BIFR and Appellate Authority stood dissolved. Companies shall have option to file reference with NCLT within 180 days with effect f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom 01.12.2016 i.e. by 29.05.2017 in terms of provisions of Insolvency and Bankruptcy Code, 2016 . - - Scholarly articles for knowledge sharing authors experts professionals Tax Management India - taxmanagementindia - taxmanagement - taxmanagementindia.com - TMI - TaxTMI - TMITax ..... 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