Supreme Court Clarifies Scope of Section 22(1) of the Sick Industrial Companies Act in Recovery Suits: Fertilizer Corporation of India vs. Coromandal Sacks (2024)

LEGAL ISSUE: Scope of Section 22(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 regarding the suspension of legal proceedings in recovery suits against sick industrial companies.

CASE TYPE: Civil Law, specifically concerning the recovery of dues and the interpretation of the Sick Industrial Companies Act.

Case Name: Fertilizer Corporation of India Limited & Ors. vs. M/s Coromandal Sacks Private Limited

[Judgment Date]: 26 April 2024

Date of the Judgment: 26th April 2024

Citation: 2024 INSC 348

Judges: J. B. Pardiwala, J., Sandeep Mehta, J.

Can a civil suit for recovery of money against a company declared sick under the Sick Industrial Companies (Special Provisions) Act, 1985, proceed if the debt is not admitted by the company? The Supreme Court recently addressed this question in a case between Fertilizer Corporation of India Limited and M/s Coromandal Sacks Private Limited. The core issue revolved around the interpretation of Section 22(1) of the 1985 Act, which deals with the suspension of legal proceedings against sick industrial companies. The court also examined the legality of awarding a 24% compound interest rate on the dues. This judgment clarifies the extent to which legal proceedings are barred against sick companies and the applicability of interest laws.

Case Background

The case involves a dispute between Fertilizer Corporation of India Ltd. (FCIL), a public sector undertaking, and M/s Coromandal Sacks Private Limited, a company that manufactures HDPE bags. FCIL had been purchasing bags from Coromandal Sacks since 1986-87. The terms of payment required FCIL to make payments within 20 days of receiving and approving the bags.

Coromandal Sacks claimed that FCIL had not paid the full agreed price for 42,000 bags and had wrongly deducted amounts towards liquidated damages and penalties. Additionally, FCIL refused to accept 25,000 bags, causing further losses to Coromandal Sacks. Consequently, Coromandal Sacks filed a civil suit to recover Rs 8,27,100.74 along with Rs 10,31,803.14 as interest.

Timeline

Course of Proceedings

The trial court partly decreed the suit in favor of Coromandal Sacks, awarding a portion of the claimed amount with 12% interest. Both parties appealed to the High Court. Coromandal Sacks contested the deductions made by FCIL and sought 24% compound interest, while FCIL argued that the trial court had erred in awarding the amounts. The High Court partly allowed both appeals, modifying the decree and awarding 24% compound interest to Coromandal Sacks.

Legal Framework

The primary legal provisions in this case are:

• Section 22(1) of the Sick Industrial Companies (Special Provisions) Act, 1985: This section provides for the suspension of legal proceedings against a sick industrial company under certain conditions. It states:
  
  “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…”
• Sections 3, 4, and 5 of the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993: These sections deal with the liability of a buyer to make payments to small-scale industries and the interest applicable on delayed payments.
  
  Section 3: “Where any supplier supplies any goods or renders any services to any buyer, the buyer shall make payment therefor on or before the date agreed upon between him and the supplier in writing or, where there is no agreement in this behalf, before the appointed day.”
  
  Section 4: “Where any buyer fails to make payment of the amount to the supplier, as required under section 3, the buyer shall, notwithstanding anything contained in any agreement between the buyer and the supplier or in any law for the time being in force, be liable to pay interest to the supplier on that amount from the appointed day or, as the case may be, from the date immediately following the date agreed upon, at such rate, which is five per cent points above the floor rate for comparable lending.”
  
  Section 5: “Notwithstanding anything contained in any agreement between a supplier and a buyer or in any law for the time being in force, the buyer shall be liable to pay compound interest (with monthly interest) at the rate mentioned in section 4 on the amount due to the supplier.”

The 1985 Act was enacted in furtherance of the principles enshrined in clauses (b) and (c) of the Article 39 of the Constitution, which directs the state to ensure that the ownership and control of the material resources of the community are so distributed as best to subserve the common good, and that the operation of the economic system does not result in the concentration of wealth and means of production to the common detriment.

Arguments

Submissions on behalf of the Appellants/Original Defendants (FCIL):

• The 1985 Act overrides the 1993 Act as it was enacted in the larger public interest to secure the directive under Article 39 of the Constitution.
• The 1993 Act does not consider situations where an industrial undertaking becomes sick and requires a revival scheme.
• Section 22 of the 1985 Act imposes a statutory bar on civil suits for recovery of money from sick industrial companies.
• The judgment of the trial court was coram non-judice and a nullity, as it lacked jurisdiction under Section 22 of the 1985 Act.
• The statutory bar under Section 22 of the 1985 Act applies to all suits for recovery, not just those for acknowledged debts.
• Only the amount of Rs 55,710 could have been recognized as delayed payment, and the deductions for liquidated damages and penalty should not be considered for interest computation under the 1993 Act.
• The High Court erred in interfering with the trial court’s discretion in awarding 12% pendente lite interest.
• The original plaintiff should have used the mechanism under Section 6 of the 1993 Act for dispute resolution.

Submissions on behalf of the Respondent/Original Plaintiff (Coromandal Sacks):

• Section 22 of the 1985 Act does not apply as the debt was not acknowledged, nor was the name of the creditor company listed before the BIFR.
• The bar under Section 22 applies only to suits for recovery of acknowledged debts, not for determination of illegal deductions and breach of contract.
• The civil court had the inherent jurisdiction to decide the suit under Section 9 of the Civil Procedure Code, 1908.
• The decision of the Delhi High Court in Sunil Mittal Properties of Shree Shyam Packaging Industries v. M/s LML Ltd. is applicable, which distinguishes between assessment and quantified recoveries.
• The High Court correctly determined the rate of interest under Section 4 of the 1993 Act, awarding 24% based on the SBI floor rate.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether the suspension of legal proceedings under Section 22(1) of the 1985 Act extends to a civil suit for recovery of money even if the debt is not admitted by the sick industrial company? If so, whether the decree in favor of the original plaintiff is coram non-judice?
2. Whether the High Court was correct in granting 24% compound interest on the principal decretal amount in favor of the original plaintiff?

Treatment of the Issue by the Court

The following table demonstrates how the Court decided the issues:

Authorities

The Supreme Court considered the following authorities while arriving at its decision:

Judgment

The Supreme Court held that the civil suit filed by Coromandal Sacks was not barred by Section 22(1) of the 1985 Act, as it was a suit for determination of liability and not for execution. The court also upheld the High Court’s decision to award 24% compound interest but modified the period for which the interest was applicable, excluding the time FCIL was under the BIFR.

How each authority was viewed by the Court?

• Gram Panchayat and Another v. Shree Vallabh Glass Works Limited and Others [CITATION]: Discussed to understand the scope of suspension of legal proceedings, but distinguished on facts.
• Maharashtra Tubes Ltd. v. State Industrial & Investment Corpn. of Maharashtra Ltd. [CITATION]: Used to interpret the term ‘proceedings’ broadly, but distinguished on facts.
• Deputy Commercial Tax Officer and Others v. Corromandal Pharmaceuticals and Others [CITATION]: Used to understand that the bar under Section 22(1) applies only to dues included in the sanctioned scheme.
• Jay Engineering Works Ltd. v. Industry Facilitation Council [CITATION]: Used to clarify that the adjudicatory process is not barred, but the execution of an award is.
• Tata Motors Ltd. v. Pharmaceutical Products of India Ltd. [CITATION]: Used to highlight that SICA is a special statute, but distinguished on the basis of Section 26 and not Section 22.
• Bhoruka Textiles Ltd. v. Kashmiri Rice Industries [CITATION]: Distinguished on facts, and read along with Raheja Universal.
• Raheja Universal Limited v. NRC Limited and Others [CITATION]: Extensively relied upon to clarify the scope of Section 22 and its conditions.
• Shree Chamundi Mopeds Ltd. v. Church of South India Trust Association CSI CINOD Secretariat, Madras [CITATION]: Used to understand the conditions for invoking Section 22(1).
• Goyal MG Gases Pvt. Ltd. v. SBQ Steels Ltd. [CITATION]: Used to understand the conditions for applicability of Section 22(1).
• Saketh India Limited v. W. Diamond India Ltd. [CITATION]: Used to understand the term ‘suit for recovery’ under Section 22(1) ejusdem generis.
• Sunil Mittal Properties of Shree Shyam Packaging Industries v. M/s LML Ltd. [CITATION]: Used to understand the distinction between ‘process of assessment’ and ‘quantified recoveries’ under Section 22(1).
• LML Ltd. v. Sunil Mittal [CITATION]: Used to understand that if the amount claimed is covered under the scheme, Section 22(1) applies.
• M/s Haryana Steel & Alloys Ltd. v. M/s Transport Corporation of India [CITATION]: Used to understand that mere contention of the sick company is not sufficient to claim protection under Section 22(1).
• Kusum Products Ltd. v. Hitkari Industries Ltd. [CITATION]: Used to understand that a suit for recovery of money simpliciter is not suspended under Section 22(1).
• FMI Investment Pvt. Ltd. v. Montari Industries Ltd. and Another [CITATION]: Used to understand that Section 22(1) applies to proceedings that threaten the assets of a sick company.
• Chhattisgarh Distilleries Ltd. v. Percept Advertising Limited [CITATION]: Used to understand that proceedings that can be halted by invoking Section 22 of the SICA should be in the nature of execution, distress or the like.
• Alok Shanker Pandey v. Union of India [CITATION]: Used to understand that interest is not a penalty but a normal accretion on capital.
• Modi Rubber Ltd. v. Continental Carbon India Ltd. [CITATION]: Used to understand that unsecured creditors must accept the scaled-down value of dues in a rehabilitation scheme.
• LML Limited v. Union of India & Others [CITATION]: Used to understand the interplay between the Sick Industrial Companies Act and the MSMED Act.
• Sarwan Singh v. Shri Kasturi Lal [CITATION]: Used to understand the interpretation of conflicting non-obstante clauses.
• Metafilms India Ltd. v. Assistant Commissioner (CT) (Addl.), Amaindakarai Assessment Circle, Chennai and Others [CITATION]: Used to understand the date on which the repayment of a loan is due when a company was referred to BIFR.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to balance the objectives of the 1985 Act and the 1993 Act. The court emphasized that the 1985 Act’s primary goal is the revival of sick industries, and any interpretation that could hinder this process should be avoided. While the 1993 Act aims to protect small-scale industries by ensuring timely payments, the court held that this should not come at the cost of jeopardizing the revival of sick companies. The court also considered the fact that FCIL was under the protection of the BIFR, and the withholding of payments during this period was not wilful.

Logical Reasoning

The court considered alternative interpretations but rejected them to ensure that the sick company’s revival was not jeopardized by excessive interest burden during the period it was under BIFR protection.

Conclusion

The Supreme Court’s judgment in Fertilizer Corporation of India vs. Coromandal Sacks clarifies the scope of Section 22(1) of the Sick Industrial Companies Act, emphasizing that the bar on legal proceedings applies to actions that can directly interfere with the revival scheme of a sick company, not merely the determination of liability. The court also harmonized the provisions of the 1985 Act with the 1993 Act, ensuring that while small-scale industries are protected, sick companies are not unduly burdened during their revival process.

This judgment is significant for its balanced approach to interpreting the laws, ensuring that the objectives of both the Sick Industrial Companies Act and the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act are met without one overriding the other. It provides a clear framework for future cases involving similar issues.