Sunday, November 23, 2014

Revival of Sick Units Takes Precedence Over Loan Recovery

[The following post is contributed by Prachi Narayan of Vinod Kothari & Company. She can be contacted at prachi@vinodkothari.com]

The Supreme Court in its judgment in the case of KSL Industries Ltd vs. Arihant Threads Ltd on October 27, 2014 finally settled the position of law over the vexed issue of precedence of two special enactments, the Sick Industrial Companies (Special Provisions) Act, 1985 (“SICA”) and the Recovery of Debt Due to Banks & Financial Institutions Act, 1993 (“RDDBFI”).

Since both the enactments are special laws, there have been diverse views from the courts with regard to precedence of one over the other. The lurking issue is finally resolved with the unanimous judgement of the three judge bench of the Supreme Court which upheld that the provisions of SICA shall prevail over the provisions of RDDBFI.

The Case

The facts of the case are that Arihant Threads Ltd (Respondent) had availed a loan from IDBI Bank for its export-oriented spinning unit set up in Amritsar, Punjab. The Respondent defaulted in payment of loan installments and IDBI moved the Debt Recovery Tribunal (DRT), Chandigarh and obtained an ex-parte order in its favour in July 2003 to dispose off the Respondent’s assets. The Respondent stayed away from the DRT proceedings despite having been given a chance to explain its position.

In September 2004, the movable and immovable properties of the Respondent were valued accordingly and put for auction wherein KSL Industries Ltd (Appellant) was declared the highest bidder.

The Respondent moved an application in DRT, Delhi for settling the ex-parte order of DRT, Chandigarh in December 2004. DRT Delhi set aside the auction sale holding that the properties of the Respondent were not valued properly.

Subsequently, both the Respondent and the Appellant moved the Debt Recovery Appellate Tribunal (“DRAT”), Delhi. DRAT Delhi stayed the ex-parte order of DRT Chandigarh. Meanwhile, the Respondent invoked the provisions of SICA by making the reference to Board of Industrial Finance & Reconstruction (BIFR). The DRAT Delhi confirmed the sale in favor of Appellant.

However, before the sale formalities could be completed, the Respondent filed two Writ Petitions in the Delhi High Court on the ground that the debt recovery procedure cannot be carried out because of the prohibition in Section 22 of the SICA. The Delhi High Court allowed the writ petitions setting aside the order of DRAT, Delhi. The Appellant preferred an appeal in the Supreme Court where, the two-judge bench had a difference of opinion. Therefore, the matter was referred to the three-judge bench that ruled that the debt recovery procedure is barred under section 22 of the SICA, which shall prevail over Section 34 of the RDDBFI.

Analysis

This judgment surely puts to rest the conundrum with regard to the precedence of one special enactment over other special act and is also quintessential to the rules of interpretation. The larger bench ruled that while addressing the precedence of SICA and RDDBFI, in view of the non obstante clause contained in both, one of the important tests is to carefully examine the purpose of the two enactments, so as to recognize and ensure that the purpose of both enactments is, as far as possible, fulfilled.

The General Rules of Interpretation

It is a settled principle of interpretation that a subsequent enactment has precedence over the previous enactment Further, the doctrine of “generalia specialibus non derogant” (general provisions will not abrogate special provisions) is also well settled.

In the instant case, both the principles became equally applicable and thus the confusion cropped up as to which principle of interpretation would apply.

However, in cases where such confusions spring up, the widely accepted rule of construction is that if one construction leads to a conflict, whereas on another construction the two enactments can be harmoniously construed, then the latter must be adopted.

The meaning of “Special”

Special in layman terms would mean “something otherwise than usual” or something designed for a particular purpose or occasion. It would not be a daunting task to ascertain when the base for comparison is “generic or general”. It becomes complicated when the task is to distinguish “the special” or “especial” between two specials.

The Apex Court has carefully and at breadth examined the issue of “especial” and addressed the same accordingly, laying down the determining factor to be the purpose of the enactment and the subject matter it deals with.

In the case of LIC vs. DJ Bahadur,[1] the Apex Court held that “In determining whether a statute is a special or a general one, the focus must be on the principal subject-matter plus the particular perspective. For certain purposes, an Act may be general and for certain other purposes it may be special and we cannot blur distinctions when dealing with finer points of law.”

The purpose of SICA is to provide ameliorative measures for reconstruction of sick companies, and the purpose of RDDBFI is to provide for speedy recovery of debts of banks and financial institutions. Indeed both are special laws. With the purpose of reconstruction and matters incidental thereto, SICA must be considered as special law, though it may be a general law in relation to recovery of debts. Whereas RDDBFI is a special law, in relation to recovery of debts and SICA may be considered as general law.

In the above context, the approach is to carefully examine the purpose, intention and objectives the enactment aims so as to construe what is actually special and what becomes general.

Further, in order to ascertain the real purpose of both the enactments and also to address the ambiguity over why in this case the subsequent act would not prevail over the previous act, a deeper look into the Statement of Objects and Reasons of both enactments becomes imperative.

Statement of objects and reasons of SICA

The introduction to SICA states: “An Act 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 connected therewith or incidental thereto.”

It is fairly clear from the above that SICA was enacted in 1985 to provide for timely determination of a body of experts for providing preventive and remedial measures that would need to be adopted to sick companies so as to address the ill effects of sickness in industrial companies such as loss of production, loss of employment, loss of revenue to the governments and locking up of investible funds of banks and financial institutions. In order to fully utilize the productive industrial assets, afford maximum protection of employment and optimize the use of funds of the banks and financial institutions, it was found imperative to revive and rehabilitate the potentially liable sick industrial companies. Further the Act not only aims to revive and rehabilitate all sick companies but those in the schedule to the Industries (Development and Regulation) Act, 1951 (IDRA), that are presumably vital to the economy of the nation.

In order to achieve the purpose for revival and rehabilitation, protection of sick companies from its creditors and the multitude of remedies which they may avail of against the sick company and its properties, it was vital and imperative for the BIFR to draw up a scheme best suited for the sick company. In this backdrop, section 22 of SICA was enacted dealing with suspension of legal proceedings, contracts, etc. during the continuation of BIFR proceedings.

Section 22 (1) provides that “Where in respect of an industrial company, an inquiry under section 16 is pending or any scheme referred to under section 17 is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal under section 25 relating to an industrial company is pending, then, notwithstanding, anything contained in the Companies Act, 1956 (1 of 1956) or any other law or the memorandum and articles of association of the industrial company or any other instrument having effect under the said Act or other law, no proceedings for the 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 a receiver in respect thereof and no suit for the recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans or advance granted to the industrial company shall lie or be proceeded with further, except with the consent of the Board or, as the case may be, the Appellate Authority.”

The Appellants had put forth that section 22 provides for stay on proceedings of winding up or execution and distress and does not provide for any stay on the recovery of debt process. The bench carefully examined the provision and ruled that the time when SICA when enacted in 1985, recovery under RDDBFI was neither in existence nor was such a mode contemplated. The section further was amended in 1994 include stay on suits for recovery of money or enforcement of security against the sick company. These words appear to have been inserted to expressly provide, rather clarify that no suits for the recovery of money, etc. would lie or be proceeded with against such a company. Further, the bench concluded that the even though “proceedings” under RDDBFI are not covered expressly but any proceeding resulting in the execution and distress against the property of such company would be construed as proceedings within the meaning of section 22.

Statement of objects and reasons of RDDBFI

The introduction to RDDBFI as provided in the text of the Act sets forth: “An Act to provide for the establishment of Tribunals for expeditious adjudication and recovery of debts due to banks and financial institutions and for matters connected therewith or incidental thereto”

RDDBFI was enacted in 1993 by the Parliament to effectively address the issue of recovery of debts due to banks and locking of investible public funds that prevented proper utilization and recycling of funds for development of country. The urgent need to work out a suitable mechanism, through which the debts of banks and financial institutions could be realized without delay, was in the form of Special Tribunals, which would follow a summary procedure for adjudication. These Tribunals eventually came to be known as Debt Recovery Tribunals, which precisely was the intent behind enactment of RDDBFI. 

However, in view of multiple remedies under various other laws for recovery of money and order to protect the sanctity of proceedings and uphold the objectives for speedy recovery of debts, exclusive protections in form of section 18 and 34 were cautiously inserted by the Parliament.

Section 34 of RDDBFI provides “ (1) Save as provided under sub-section (2), the provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act.

(2) The provisions of this Act or the rules made thereunder shall be in addition to, and not in derogation of, the Industrial Finance Corporation Act, 1948 (15 of 1948), the State Financial Corporations Act, 1951 (63 of 1951), the Unit Trust of India Act, 1963 (52 of 1963), the Industrial Reconstruction Bank of India Act, 1984 (62 of 1984), the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and the Small Industries
Development Bank of India Act, 1989 (39 of 1989).”

Sub-section 1 as stated above is a saving as well as a non-obstante clause conferring an overriding effect of the provisions of the RDDB over other laws for the time being in force, while sub-section 2 is in addition to and not in derogation of the special statues as provided for. Further, it is pertinent to note here that reference to SICA and the Small Industries Development Bank of India Act, 1989 (39 of 1989), was inserted with effect from 17.01.2000 by Act No. 1 of 2000 of the Parliament.

Sub-section 1 starting with “save as provided in sub-section 2 ”, is a saving clause. According to Black’s Law Dictionary[2]A saving clause in a statute is an exception of a special thing out of the general things mentioned in the statute; it is ordinarily a restriction in a repealing act, which is intended to save rights, pending proceedings, penalties, etc., from the annihilation which would result from an. unrestricted repeal”

The meaning as set forth above clearly carves an exception for sub-section 2, thereby preserving the contents and interpretations as stated therein.

Further, upon cursory and plain reading of language of sub-section 2, it is fairly clear that when an Act provides that its provisions shall be in addition to and not in derogation of another law or laws, it means that the legislature intends that such an enactment shall co-exist along with the other Acts. Further, the act of the legislature to further amend and include SICA within the purview was also to be construed as per principles of co-existence. It is clearly not the intention of the legislature, in such a case, to annul or detract from the provisions of other laws.

It is herein important to construe the meaning of the phrase “not in derogation of”. Black’s Law Dictionary[3] defines derogation as “The partial repeal or abolishing of a law, as by a subsequent act which limits its scope or impairs its utility and force. Distinguished from abrogation, which means the entire repeal and annulment of a law”

In view of the above, it is undoubtedly clear that the subsequent Act cannot be in nature of limiting the scope of relief as provided under the previous act. It necessarily has to provide an impetus to the objectives of the previous act and not vitiate the same. The express inclusion of the phrase “not in derogation of” in sub-section 2 of section 34 of RDDBFI undoubtedly establishes that the legislature never intended to undermine the force and utility of SICA by enacting RDDBFI but rather intended to preserve the powers of the authorities under the SICA and save the proceedings from being overridden by the subsequent enactment i.e. the RDDBFI.

Conclusion

Even though the judgment settles the issue of precedence of SICA over RDDBFI, the implications are far-reaching and wide. Any defaulter could possibly apply to BIFR for reconstruction thus delaying debt recovery process and with courts frequently staying the recovery proceedings it would adversely affect the recovery climate in the country. Further, it would also largely affect the value of the collateral and its enforceability, as litigation as all know is a time consuming affair in the country. This clearly indicates that banks and financial institution would now have to bear the brunt of more bad loans.

It is further disheartening to see that legislation dating back as early as 1980 and 1990s are found contradicting three decades after. It surely indicates that drafting was ill-considered leaving it to the interpretation of the courts each time leading to severe inefficiencies in the implementation of the legislation.

- Prachi Narayan




[1] (1981) 1 SCC 315
[2] http://thelawdictionary.org/saving-clause/
[3] http://thelawdictionary.org/derogation/

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