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Sunday, July 3, 2016

the provisions of SICA prevail over the provisions of the Companies Act.

                                             REPORTABLE
                        IN THE SUPREME COURT OF INDIA
                        CIVIL APPELLATE JURISDICTION
                        CIVIL APPEAL NO. 1475 OF 2006
M/s. Madura Coats Limited                  ...... Appellant
                                     VS
M/s. Modi Rubber Ltd. & Anr.                  …..Respondents

                               J U D G M E N T

Madan B. Lokur,  J.
1.     The appellant (Madura Coats) is aggrieved by the judgment  and  order
dated 20th May, 2004 passed by the Division  Bench  of  the  Allahabad  High
Court in Special Appeal No. 420 of 2004. By the impugned judgment and  order
the Division Bench of the High Court  allowed  the  Special  Appeal  of  the
respondent  and  stayed  further  proceedings  before  the   Company   Court
consequent upon a winding up  order  passed  against  the  respondent  (Modi
Rubber) till a final decision is taken on a reference made  by  Modi  Rubber
to the Board for Industrial and Financial Reconstruction.
2.     Company Petition No.1 of 2002  was  filed  by  Madura  Coats  in  the
Allahabad High Court for winding up Modi Rubber on the allegation that  Modi
Rubber was unable to pay its huge undisputed debts.  Notice  was  issued  in
the Company Petition to Modi Rubber who entered appearance but took  several
adjournments in the matter on one pretext or the other including  furnishing
the schedule for repayment  of  the  admitted  dues  to  the  creditors,  an
arrangement being worked out  with  Apollo  Tyres  Ltd.  and  various  other
reasons.
3.     Eventually, after  two  years  of  adjournments,  the  Company  Court
declined to grant any further adjournment to Modi Rubber. Accordingly, on  a
consideration of the material on record and after  hearing  learned  counsel
for the parties, the Company Court passed  an  order  on  12th  March,  2004
holding that Modi Rubber was unable to pay its undisputed debts and that  it
was  just  and  equitable  that  the  company  be  wound  up.   An  Official
Liquidator was appointed to take charge of the assets of the company and  to
submit a report along with the inventory.
4.     Feeling aggrieved by the winding up order, Modi Rubber  preferred  an
appeal before the Division Bench of the High Court which was allowed by  the
impugned judgment and order.
5.     Before the Division Bench it was brought out for the first time  that
on 6th December, 2003 the Board of Directors of Modi  Rubber  had  passed  a
resolution to file a reference before the Board of Industrial and  Financial
Reconstruction (for short ‘the BIFR’)  under  the  provisions  of  the  Sick
Industrial Companies (Special Provisions) Act, 1985 (for short ‘the SICA’).
6.     Pursuant to the aforesaid resolution,  an  application  was  made  by
Modi Rubber to the BIFR on 3rd February, 2004  which  was  received  by  the
BIFR on 4th February, 2004.  Thereafter,  the  application  was  scrutinized
and on 17th March, 2004 the reference made by Modi Rubber was registered  as
Case No. 153 of 2004.  It will  be  seen  that  while  the  application  for
making a reference was sent to the BIFR before  the  winding  up  order  was
passed by the Company Court, the reference  was  actually  registered  after
the winding up order was passed by the Company Court.
7.     On these broad facts, it was contended  by  Modi  Rubber  before  the
Division Bench that in view of the decision of  this  Court  in  Real  Value
Appliances Ltd. v. Canara Bank[1] on filing an application before the  BIFR,
all proceedings in respect of the company  ought  to  have  been  stayed  in
terms of Section 22 of the SICA. Consequently, even the  Division  Bench  of
the High Court could not have decided the appeal filed by Modi Rubber.  This
contention was rejected by the High Court and it was held that  the  crucial
date for a stay of proceedings under Section 22 of the SICA is the  date  on
which the reference is registered with the BIFR and not the  date  on  which
an application for reference is filed.
8.     However, the  High  Court  took  into  consideration  the  subsequent
events namely the fact of registration of the  reference  and  relying  upon
Rishabh Agro Industries Ltd. v. P.N.B. Capital Service Ltd.[2] it  was  held
that Modi Rubber was now entitled  to  the  benefit  of  the  provisions  of
Section 22 of the SICA.  It was also held that a  winding  up  order  passed
under the Companies Act, 1956 (for short ‘the Companies  Act’)  is  not  the
culmination of the proceedings pending before the Company Court.  The  final
order to be passed in the winding up proceedings is an order of  dissolution
of the company under Section 481 of the Act.
9.     Under the circumstances, the High Court  set  aside  the  winding  up
order passed by the Company Court and further directed that the  proceedings
before him shall remain in abeyance till the disposal of proceedings  before
the authorities under the SICA.
10.    Leave to appeal against the judgment and order of the High Court  was
granted on 24th February, 2006 and the following order passed:

“Leave granted.
Whether  the  Board  of  Industrial  and  Financial  Reconstruction   should
entertain a reference made by a sick company in terms of Section 15  of  the
Sick Industrial Companies (Special Provisions)  Act,  1985,  (‘SICA’)  after
the company had already been directed to be wound up by a Company  Judge  in
a matter which was pending before the Court for 2 years,  vis-à-vis  Section
22 of the Act is in question  in  this  appeal,  which  arises  out  of  the
judgment and order dated 20.05.2004 passed by  the  Division  Bench  of  the
High Court of Judicature at Allahabad in Special Appeal No.  420/2004.   Our
attention has been drawn to a Division  Bench  decision  of  this  Court  in
Rishabh Agro Industries Ltd. v. P.N.B. Capital Services Ltd., (2000)  5  SCC
515, wherein this Court opined that the reference in terms of Section 15  of
SICA can  be  made  even  after  passing  of  the  winding  up  order.   The
correctness of the ratio of the said decision  has  been  questioned  before
us.  We are inclined to think that there is merit in the  challenge  to  the
correctness of the view taken therein.  We are also of the opinion that  the
proposition of law stated in the said decision of  this  Court  may  require
reconsideration having regard to Section 20 of the Act and  the  object  and
scope of SICA vis-à-vis the  provisions  of  the  Companies  Act.   We  are,
therefore, of the opinion that the matter be referred  to  a  larger  Bench.
Let the records of the case be placed before Hon’ble the  Chief  Justice  of
India for constitution of a larger Bench.
Hearing of the appeal is expedited.  Liberty to mention.”

It is under these circumstances that this appeal has been placed  before  us
for consideration.
11.    During the hearing of this appeal, further facts were  placed  before
us.  It was pointed out that the reference made by Modi Rubber to  the  BIFR
was challenged by Madura Coats by  filing  Civil  Misc.  Writ  Petition  No.
17870 of 2004 in the Allahabad High Court.  A view was  taken  by  the  High
Court in its  order  dated  10th  May,  2004  that  the  writ  petition  was
premature and the maintainability  of  the  reference  could  be  raised  by
Madura Coats before the BIFR.  Under the circumstances, the High  Court  did
not consider it proper to entertain the writ petition which was  accordingly
dismissed.
12.    Following upon the order passed  by  the  High  Court,  Madura  Coats
moved an application before the BIFR on  or  about  12th  January,  2006  in
which it was prayed that Madura  Coats  be  impleaded  as  a  party  in  the
proceedings and that its  dues  with  interest  thereon  be  included  as  a
pressing creditor in the rehabilitation scheme. It is not clear whether  any
formal order was passed impleading Madura Coats in  the  proceedings  before
the BIFR, but in any event, it does  appear  from  the  record  that  Madura
Coats participated in the proceedings before the BIFR.
13.    We were told by learned counsel for Modi Rubber that before the  BIFR
a Draft Rehabilitation Scheme (DRS) for revival of  the  company  was  filed
and advertised on 18th January, 2008.   In  connection  with  the  DRS,  the
summary record of proceedings of the BIFR  of  8th  April,  2008  notes  the
presence of the advocate for Madura Coats in paragraph 7.20 and records  the
submission that Madura Coats does not agree for a settlement at 30%  of  the
admitted amount as proposed.  The BIFR also noted in paragraph  7.38.1  that
objections to the DRS were raised by  some  employees,  unsecured  creditors
and  a  few  governments/government  agencies.   It  was  also  noted   that
unsecured creditors have  to  fall  in  line  with  the  provisions  of  the
rehabilitation scheme in the interest of revival of Modi Rubber.
14.    Paragraph 7.38.1  of  the  summary  record  of  proceedings  read  as
follows:-


“7.38.1 Objections were raised by some employees, unsecured creditors and  a
few  Governments/Government  agencies.   It  is  very  important  that   the
interest of the employees is safeguarded and employment is  protected  while
reviving the company.  The terms for settlement of the dues of  the  workers
should not be inferior to the terms offered for settlement of  the  dues  of
the secured creditors.  Unsecured creditors have to fall in  line  with  the
provisions of the rehabilitation scheme in the interest of  revival  of  the
company in respect of Government/Government agencies  who  objected  to  the
DRS, the words “to consider” have to be  stipulated  in  the  DRS.   DB  and
Arsec (I) Ltd., the two secured creditors who raised objections have  agreed
to settle the matter with the company.”

15.    The  BIFR  finally  issued  certain  directions,  one  of  which  was
sanctioning the rehabilitation scheme under Section 19(3) and 19(4) of  SICA
for implementation by all concerned.  As far as the unsecured creditors  are
concerned (and  this  includes  Madura  Coats),  the  rehabilitation  scheme
provided for acceptance of the outstanding dues as per one of the  following
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  the  final  payment.
The payment shall be made in 3 equal annual installments from  the  cut  off
date (i.e. 31.03.2008).  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 by the BIFR.”

We were told that Madura Coats did not challenge the rehabilitation scheme.
16.    Under the circumstances, Modi Rubber addressed  a  letter  to  Madura
Coats on 3rd September, 2008 informing the  approval  and  sanction  of  the
rehabilitation  scheme  by  the  BIFR  and  indicating  the  three   options
available to Madura Coats for clearing the outstanding dues.  It seems  that
no reply was received by Modi Rubber to  this  communication.   Accordingly,
Modi Rubber sent another communication to Madura Coats on 12th August,  2011
reminding it to accept the settlement. In this communication,  it  was  also
mentioned that one raw  material  supplier  had  challenged  the  settlement
terms by filing an appeal before the Appellate Authority for Industrial  and
Financial Reconstruction but that it had lost in the appeal.
17.    Learned counsel for Modi Rubber brought to our notice  a  few  orders
passed by  the  Company  Court  after  the  approval  and  sanction  of  the
rehabilitation scheme.  These  orders  which  have  been  placed  on  record
suggest that Modi Rubber was willing to pay the  dues  to  Madura  Coats  in
terms of the rehabilitation scheme and  that  the  liability,  according  to
Modi Rubber was  Rs.  2.73  crores  while  according  to  Madura  Coats  the
liability was more than Rs. 4.00 crores.  By an order dated  16th  November,
2011 Modi Rubber was directed by the Company Court to pay an amount  of  Rs.
1.50 crores to Madura Coats within one month.  This  payment  of  more  than
50% of the dues was made to Madura Coats  by  a  cheque  on  15th  December,
2011.  We were told by learned counsel for Modi Rubber that the  cheque  was
encashed by Madura Coats on 19th December, 2011.
18.    The correctness of the impugned judgment and order will  need  to  be
tested on these facts and the law placed before us in  connection  with  the
reference made to the larger Bench.  On  hearing  learned  counsel  for  the
parties on these facts, we are of the opinion that different situations  can
arise in the interplay between the Companies Act and the SICA in the  matter
of winding up of a company and these  situations  have  already  been  dealt
with by this Court at one time or another.

19.    One such situation is where winding up proceedings are pending and  a
reference is made to the BIFR. This situation occurred in Real  Value  where
winding up proceedings were pending and the  appointment  of  a  provisional
liquidator was under challenge.  At that stage, steps  were  taken  by  Real
Value for making a reference under Section 15  of  the  SICA  to  the  BIFR.
Under these circumstances, one of the questions agitated  for  consideration
by this Court was whether on the registration of a reference,  the  Division
Bench of the High Court could pass orders in an appeal  against  an  interim
order passed by the Company Court.
20.    While referring to the provisions of the SICA, this  Court  concluded
that once a reference is registered after scrutiny, it is mandatory for  the
BIFR to conduct an enquiry.  It was also held that the SICA is  intended  to
revive and rehabilitate a sick industry before it can be wound up under  the
Companies Act.  The legislative intention is to ensure that  no  proceedings
against the assets of the company are taken before any decision is taken  by
the BIFR because if the assets are sold or the company is wound up,  it  may
become difficult to later restore the status quo ante.  It was held that  it
is for this reason that the enquiry under Section 16 of  the  SICA  must  be
treated to have commenced as soon as the registration of  the  reference  is
completed after scrutiny and that action against the company’s  assets  must
remain stayed in view of Section 22 of the SICA till  a  final  decision  is
taken by the BIFR. This is what this Court  said  in  paragraph  23  of  the
Report:

“It is argued that if the reference before the BIFR is only at the stage  of
registration under Section 15,  then  Section  22  is  not  attracted.  This
contention, in our opinion, has no merit. In our view,  when  Section  16(1)
says that the BIFR can conduct the inquiry “in such manner as  it  may  deem
fit”, the said words are intended only to convey that a wide  discretion  is
vested in the BIFR in regard to the procedure it may follow  for  conducting
an inquiry  under  Section  16(1)  and  nothing  more.  In  fact,  once  the
reference is registered after scrutiny, it is, in our  view,  mandatory  for
the BIFR to conduct an inquiry. If one looks at the format of the  reference
as prescribed in the Regulations, it will be clear  that  it  contains  more
than fifty columns regarding extensive financial details  of  the  Company’s
assets, liabilities, etc. Indeed, it will be practically impossible for  the
BIFR   to   reject   a    reference    outright    without    calling    for
information/documents or without  hearing  the  Company  or  other  parties.
Further, the Act is intended to  revive  and  rehabilitate  sick  industries
before they can be wound up under the Companies Act, 1956……. It is also  the
legislative intention to see that no  proceedings  against  the  assets  are
taken before any such decision  is  given  by  the  BIFR  for  in  case  the
Company’s assets are sold, or the Company wound  up  it  may  indeed  become
difficult later to restore the status quo  ante.  Therefore,  in  our  view,
[the High Court of Allahabad, the High Court of Andhra Pradesh and the  High
Court of Himachal Pradesh] are right in rejecting such a contention  and  in
holding that the inquiry must be treated as having commenced as soon as  the
registration of the reference is completed  after  scrutiny  and  that  from
that time, action against the Company’s assets must remain stayed as  stated
in Section 22 till final decisions are taken by the BIFR.”

21.    This Court also referred to the Regulations  framed  under  the  SICA
and in connection  therewith  it  was  held  that  after  the  amendment  of
Regulation 19 with  effect  from  24th  March,  1994  once  a  reference  is
registered and it becomes mandatory to simultaneously call  for  information
or documents from the informant and such  a  direction  is  given,  then  an
enquiry under Section 16(1) of the SICA must, for the  purposes  of  Section
22 thereof, be deemed to have commenced. This is what  this  Court  held  in
paragraph 30 of the Report:

“There can, therefore, be no difficulty in holding that after the  amendment
to Regulation 19 w.e.f. 24-3-1994, once  the  reference  is  registered  and
when once it is mandatory simultaneously to call  for  information/documents
from the informant and  such  a  direction  is  given,  then  inquiry  under
Section 16(1) must - for the purposes of Section 22  -  be  deemed  to  have
commenced.  Section  22  and  the  prohibitions  contained   in   it   shall
immediately come into play.”

22.    Another facet of this situation is when proceedings are pending  both
before the BIFR and the Company Court but no order of winding  up  has  been
passed against the company. In such a situation (though we are not  directly
concerned with  it)  this  Court  took  the  view  in  Tata  Motors  Ltd  v.
Pharmaceutical Products of India Ltd[3] that the provisions  of  SICA  would
prevail over the provisions of the Companies Act. In that case a  scheme  of
rehabilitation of the company was prepared and  presented  before  the  High
Court under Section 391 of the Companies Act while proceedings were  pending
before the Appellate Authority for Industrial and  Financial  Reconstruction
(AAIFR) under the SICA. The High Court approved  the  scheme  of  compromise
and arrangement and in view of the order of the High Court  the  AAIFR  also
approved the scheme. This Court relied upon NGEF Ltd. v. Chandra  Developers
(P) Ltd.[4] to conclude that the Company Court and the BIFR do not  exercise
concurrent jurisdiction. “Till the company remains  a  sick  company  having
regard to the provisions of sub-section (4) of Section  20  [of  the  SICA],
BIFR alone shall have jurisdiction as regards sale of  its  assets  till  an
order of winding up is passed by a Company Court.” Since the  provisions  of
the SICA would prevail over the Companies Act,  this  Court  held  that  the
High Court could not have exercised jurisdiction and approved the scheme  of
compromise and arrangement prepared under Section 391 of the Companies Act.
23.    Another situation is where a  winding  up  order  is  passed  by  the
Company Court but it is stayed in appeal.  In Rishabh Agro the  company  was
ordered to be wound up but this order was stayed by the  Division  Bench  of
the concerned High Court. Thereafter the company made  a  reference  to  the
BIFR under Section 15 of the SICA.
24.    Under these circumstances, one of the contentions  urged  by  learned
counsel for the respondents in that case was that an unscrupulous  litigant,
after suffering an order of winding up, could approach the BIFR and get  the
winding up proceedings stayed.  This Court observed that  such  a  grievance
might be justified but if a provision of law is  misused  and  subjected  to
abuse of the process of law, it is for the Legislature to  take  appropriate
steps.
25.    With regard to the merits of the controversy before  it,  this  Court
took the view that it could not be said that the provisions  of  Section  22
of the SICA would not be attracted after an order of winding up  is  passed.
While referring to this Section it was held that there  was  no  doubt  that
the provision would be applicable even after the winding up order is  passed
and no proceedings even thereafter could be taken  under  the  Act.  It  was
noted that a winding up order passed under the Act is  not  the  culmination
of  the  proceedings  before  the  Company  Court  but  is  in  effect   the
commencement  of  the  process  which  ultimately  would   result   in   the
dissolution of the company in terms of Section 481 of the Act. This is  what
this Court had to say in paragraphs 9 and 11 of the Report:

“9. It is true that for invoking the applicability of Section 22 it  has  to
be established that an inquiry under Section 16 is  pending  or  any  scheme
referred to under Section 17 is under preparation or  sanctioned  scheme  is
under implementation or an appeal under Section 25 to an industrial  company
is pending. But it cannot be said that despite the existence of any  of  the
aforesaid exigencies the provision of Section  22  would  not  be  attracted
after the order of winding up of the company is passed. The words
“no proceeding for winding up of the industrial company  or  for  execution,
distress or the like  against  any  of  the  properties  of  the  industrial
company or for the appointment of receiver in respect thereof shall  lie  or
be proceeded with further”,
leave no doubt in  our  mind  that  the  effect  of  the  section  would  be
applicable even after the winding-up order is passed as no  proceeding  even
thereafter can be proceeded with further under the Companies Act.  The  High
Court appears to have not taken note of  the  aforesaid  words  i.e.  to  be
proceeded with further.  As  the  impugned  judgment  is  based  upon  wrong
assumption of the provision of law and completely ignoring the  vital  words
noticed hereinabove, the same cannot be sustained.
10. xxxxx
11. It may also be noticed that winding-up order passed under the  Companies
Act is not the culmination of the proceedings  pending  before  the  Company
Judge but is in effect the commencement of the process. The  ultimate  order
to be passed in such a petition is the dissolution of the Company  in  terms
of Section 481 of the Companies Act.”

26.    In view of the above, this Court was  of  opinion  that  the  interim
order passed by the High Court after the reference  was  registered  by  the
BIFR could not be sustained and deserved to be set aside.
27.    From the above it is quite clear that different situations can  arise
in the process of winding up a company under the Companies Act but  whatever
be the situation, whenever a reference is made to the  BIFR  under  Sections
15 and 16 of the SICA, the provisions of the SICA would come into  play  and
they would prevail over the provisions of the Companies Act and  proceedings
under the Companies Act must give way to proceedings under the SICA.
28.    In this state of the  law,  in  so  far  as  the  present  appeal  is
concerned, we do not find any error in the view taken by the High  Court  in
concluding that the winding up proceedings before the Company  Court  cannot
continue after a reference has been registered by the BIFR  and  an  enquiry
initiated under Section 16 of the  SICA.  The  present  appeal  is  squarely
covered by the primacy  given  to  the  provisions  of  the  SICA  over  the
Companies Act as delineated in Real Value, Rishabh  Agro  and  Tata  Motors.
Consequently, the High Court was right in concluding that the provisions  of
Section 22 of the SICA would come into  play  and  that  the  Company  Court
could not proceed further in the matter pending  a  final  decision  in  the
reference under the SICA.
29.    Quite apart from the above, we are also of opinion that  in  view  of
the subsequent developments and the fact that Madura Coats had  participated
before the BIFR and has taken  its  dues  in  terms  of  the  rehabilitation
scheme approved and sanctioned by the  BIFR,  nothing  really  survives  for
consideration in this appeal. Strictly speaking, we have  merely  undertaken
an academic exercise pursuant to a reference made to a larger Bench.
30.    As far as the reference is concerned we are of  the  view  that  Real
Value and Rishabh Agro do not require any reconsideration. Tata  Motors  was
decided by a Bench of three Judges and we see no reason to differ  from  the
view taken therein that the provisions of SICA prevail over  the  provisions
of the Companies Act.
31.    The appeal is without merit and is dismissed.



                              ……..……………………………..J
                                ( Jagdish Singh Khehar)


                                ……………………………………J
                                     ( Madan B. Lokur )


                                        …..………………………………J
                                           ( C. Nagappan )
New Delhi;
June 29, 2016


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[1]  (1998) 5 SCC 554
[2]  (2000) 5 SCC 515
[3]  (2008) 7 SCC 619
[4]  (2005) 8 SCC 219

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