Source: Supreme Court

Why in News?

Recently the Supreme Court held that the suit instituted for recovery of dues from a sick company will not be hit by Section 22 (1) of the Sick Industrial Companies (Special Provision) Act, 1985 (1985 Act), if it does not affect the properties of the sick company or revival scheme.

What was the Background of Fertilizer Corporation of India Limited & Ors. v. M/S Coromandal Sacks Private Limited case?

• A company M/s Coromandal Sacks Private Limited, the original plaintiff which is engaged in the manufacturing of High Density Poly Ethylene (HDPE) bags.
• A company Fertilizer Corporation of India Ltd., the original defendant is a Public Sector Undertaking of the Government of India.
• The original defendants required HDPE bags for their customers and placed an order for the same with the plaintiff.
• The terms and conditions for technical specifications of the bags and for payment were specified in the notices inviting tender (NIT) issued sometimes and the purchase orders issued in pursuance thereof.
• According to such terms, the defendant had to make an entire payment within 20 days of the receipt of the bags and approval of the same.
• The terms of the purchase order also entitled the defendants to deduct up to a maximum of 5% of the contract price towards liquidated damages upon delay in supply of bags by the original plaintiff.
• The plaintiff instituted a suit before the trial court, and his contention was that the purchase orders were amended to increase the number of bags, and for this requirement the plaintiff supplied 42,000 bags over and above the quantity.
• The plaintiff was aggrieved by the deductions made by the defendants for delay in supply and for poor quality of bags.
• The plaintiff also claimed that he suffered losses due to the refusal to accept 25,000 bags after placing the order.
• The plaintiff instituted the civil suit for the recovery of Rs 8,27,100.74/- along with Rs 10,31,803.14/- towards interest up to the date of institution of the suit.
• The defendant in his written statement stated that they had been declared to be a sick company under Section 3(1)(o) of the Sick Industrial Companies (Special Provision) Act, 1985 (1985 Act) and this suit for recovery is not maintainable according to Section 22(1) of 1985 Act and interest @ 24% was not liable to be imposed.
• The Trial Court decreed the plaintiff’s suit held that the defendant’s company failed to prove that it is a sick company and directed the defendant to pay Rs. 55,710/-, Rs. 100,848 and Rs. 1,18,000/- to the plaintiff together with interest @ 12% per annum and Rs. 1,72,734/- with interest @ 12% per annum.
• Appeal was filed before the High Court. The High Court accepted the contention of the plaintiff on the issue of interest and granted 24% compound interest on the amounts due. And set aside the decree of the trial court which granted 12% simple interest in favor the plaintiff.
• The defendant presents an appeal before the Supreme Court.

What were the Court’s Observations?

• The Supreme Court held that the suit was a simple suit for recovery of money towards the dues arising under the alleged illegal deductions under the contract.
• The suit for recovery was not of a nature which could have proved to be a threat to the properties of the defendant sick company or would have adversely impacted the scheme of revival.
• This cannot be said to be a proceeding in the nature of execution, distress or the like and hence the suit was not hit by Section 22(1) of the 1985 Act.
• The conditions given under Section 22(1) of 1985 Act are fulfilled, there is no bar on institution of suit against the sick company.
• An order of the High Court is upheld only subject to the modification of the period for which interest may be granted. And the High Court committed no error in awarding 24% interest.

What are the Landmark Judgments Cited in this Case?

• Bhoruka Textiles Ltd. v. Kashmiri Rice Industries (2009)
  • The Supreme Court held that if the jurisdiction of the civil court was ousted in terms of the jurisdictional bar imposed under Section 22 of the 1985 Act, then any judgment rendered by it would be coram non-judice and as a result a nullity.
• Raheja Universal Limited v. NRC Limited and Others (2012)
  • The Supreme Court held that a suit for recovery of money simpliciter will not be liable to be suspended under Section 22(1) of the 1985 Act.
• Tata Motors Ltd. v. Pharmaceutical Products of India Ltd. [(2008)
  • The Supreme Court held that the 1985 Act is a special statute and, thus, overrides other Acts like the Companies Act, 1956.

Who is Sick Company?

• Sick company means a company which has failed to pay or to secure the debt of the secured creditors within a specified time.
• A company who is struggling financially with accumulated losses more than or equal to its net worth is called a sick company.
• Winding up of a sick company is avoided as much as possible because it affects government revenues, jobs and money for creditors. In the worst case, sick company can be wound up.
• The word ‘sick industrial company’ was defined under Section 3 (1) (o) of 1985 Act as “an industrial company (being a company registered for not less than five years) which has at the end of any financial year accumulated losses equal to or exceeding its entire net worth.”
• The Companies Act, 2013 prescribes a detailed legal procedure for reviving and rehabilitating sick companies.

What is the Sick Industrial Companies (Special Provision) Act, 1985?

• The government found there was an increase in the incidents of sickness of companies which results in loss of production, loss of employment, loss of revenue etc.
• The government felt the need to enact legislation to provide preventive, remedial measures and rehabilitation to sick companies.
• The Sick Industrial Companies Act of 1985 was enacted to identify or detect sick companies and potentially sick companies. To address a problem and try to revive and rehabilitate them.
• The Act created two level bodies to help and rehabilitate sick companies.
• Board of Industrial and Financial Reconstruction (BIFR).
• Appellate Authority for Industrial and Financial Reconstruction (AAIFR)
• The 1985 Act was repealed and replaced in 2003 by the Sick Industrial Companies (Special Provisions) Repeal Act of 2003.
• The 1985 Act was fully repealed in 2016, in part because some of its provisions overlapped with the provisions of a separate Act, the Companies Act of 2013 under Chapter XIX (Sections 253 to 269).

What are the Legal Provisions Involved in this Case?

Section 22 (1) of the Sick Industrial Companies (Special Provision) Act, 1985:

• This Section deals with the suspension of legal proceedings, contracts, etc.
• It states 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.

What is the Procedure of Rehabilitation and Revival under the Companies Act, 2013?

The Companies Act provides a process under Chapter XIX for the revival and rehabilitation of sick industrial companies to help them in times of crisis.

• Filing an Application for Determination of Sickness of the Company
  • Any secured creditor representing 50% or more of the company’s outstanding debt can file the application before the tribunal.
• Order Passed by the Tribunal
  • The tribunal will pass an order after considering all facts, documents and evidence within 60 days of receiving the application.
  • If the tribunal is satisfy that a company is a sick company, further procedures are to be followed
• Submitting an Application for Revival and Rehabilitation to the Tribunal
  • Any secured creditor or sick company itself can apply before the tribunal to decide measures to revive and rehabilitate the company. The following documents must be submitted: financial statement, draft scheme, if any, other information, documents and fees.
• Appointment of an Interim Administrator
  • The tribunal will appoint an interim administrator within 7 days of receiving the application.
  • The interim administrator will conduct a meeting of the committee of creditors within 45 days of order of tribunal.
  • The interim administrator must submit a report within 60 days of order of tribunal.
  • The interim administrator will create a committee of creditors.
  • He can ask them to provide any information or documents.
• Order of the Tribunal
  • The tribunal on the fixed hearing date decides whether the company can be revived or rehabilitated.
  • If it is possible to revive or rehabilitate the company, the tribunal will appoint a person to prepare a draft scheme.
• Appointment of Company Administrator
  • He will draft a scheme to revive the sick company, and the Tribunal can also order him to take over the company’s management.
• Preparation of Scheme for Revival and Rehabilitation
  • The company administrator shall prepare a scheme of revival and rehabilitation after considering the draft scheme filed by the company.
  • The administrator will present the scheme within 60 days of his appointment.
  • Once the scheme is approved, the administrator can submit it to the Tribunal.
  • If the Tribunal is satisfied that there is a possibility of implementing the scheme, the tribunal will sanction the scheme.
• Implementation of the Scheme
  • A sanctioned scheme is binding on the sick company, its employees, shareholders, creditors, guarantors, and the amalgamating company.