Sunday, July 10, 2016

Supreme Court Resolves Conflict Between Companies Act and SICA

[The following guest post is contributed by Aditi Jhunjhunwala, who is a partner at Vinod Kothari & Co. The author can be contacted at aditi@vinodkothari.com.]

In a recent ruling in the case of Madura Coats Limited v. Modi Rubber Ltd. & Anr., the question before the Supreme Court on appeal was: where an order for winding up is passed under the Companies Act and the company has made a reference before the Board for Industrial and Financial Reconstruction (BIFR) which is registered, can the company take shelter under section 22 of Sick Industrial Companies Act, 1985 (SICA) (that relates to suspension of legal proceedings and contracts)? The Court upheld the argument and ruled that the very scheme of law is that the revival of company must be first resorted to rather than putting it to death. In paragraph 20 the Court observed that:

“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.”

This post highlights some of the important issues that arise from the ruling.

Overriding effect of SICA

Section 22 of SICA is a non-obstante clause providing that any other legal proceedings under any other law in connection with the industrial company shall not be proceeded with any further and that a winding up order, if any, will also be stayed where a reference has been made before the BIFR. A similar issue was raised in the present case as well where Modi Rubber resorted to the making of an application before BIFR while the Court had passed the winding up order against it on an application made by Madura Courts Limited. However, the very scheme of law is that it does permit such an action by a company whereby it may use this leeway and take shelter under section 22 of SICA wherein the provisions of SICA would prevail over Companies Act. Similar decisions have been rendered in the case of Tata Motors Ltd v. Pharmaceutical Products of India Ltd., (2008) 7 SCC 619 and Real Value Appliances Ltd. v. Canara Bank, (1998) 5 SCC 554, which were relied upon by the Modi Rubber in the instant case.

The High Court however did not take into consideration the contention of Modi Rubber citing that what is important is not the date of filing the application with BIFR but the date of registration of the application, which in the present case was after the date of the passing of the winding up order. However, the Court thereafter 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., (2000) 5 SCC 515 it was held that Modi Rubber was entitled to the benefit of the provisions of Section 22 of the SICA. The High Court also held that a winding up order passed under the Companies Act, 1956 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.      

Abuse of process of law

It was argued by Madura Courts that since the reference before BIFR got registered only after passing of the order of the winding up by the Court, Modi Rubber cannot take shelter under SICA and that the order for winding up should prevail. However, the Court based on various judicial pronouncements and the scheme of law discussed that the scheme is such that the company must be first allowed for revival and that only then should the period of moratorium begin. Although this scheme seems to be in the spirit of things, this provision being overriding in nature over other laws may be used as a protracting device by companies at times. The provisions of SICA prevailing over the winding up order has always been controversial. In paragraph 25 of the ruling the Court discussed 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.

In fact the Court in paragraph 20 lamented that although at times it may seem that the provision of law may be used but may cause abuse of process of law, however, the Court cannot do anything about the same as the same is for the legislature to take appropriate steps. Therefore, this become obvious that the Court also acknowledges the fact that the provisions of law could be misused as well.

Provisions under the Bankruptcy Code

The provisions of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the “Code”) provides for corporate insolvency process. Once the Code comes into force, the Sick Industrial Companies (Special Provisions) Repeal Act, 2003 will be enforced. Once the said Act gets enforced, SICA being the principal legislation will lose its existence. Therefore, the revival of companies will not be possible under SICA. Currently, sections 253 to 269 of the Companies Act, 2013 provide for revival of companies; however, the said sections are not yet enforced. Therefore, once SICA gets repealed one would have to take shelter under the Companies Act, 2013. However, with the Code coming into force, these sections will get omitted as one will have to proceed for revival under Chapter II of the Code.

Once an application under the Code is admitted by the National Company Law Tribunal (NCLT), all the proceedings under other laws will be stayed until the moratorium period under the Code.


- Aditi Jhunjhunwala

2 comments:

ashok said...

Very well written and lucidly explained. It shows good research made by author.

Anand Mohan said...

very well explained