Supreme Court settles rights of unsecured creditors in SICA rehabilitation schemes: Modi Rubber Ltd. vs. Continental Carbon India Ltd. (2023)

Date of the Judgment: 17 March 2023
Citation: (2023) INSC 207
Judges: M.R. Shah, J. and Sudhanshu Dhulia, J.
Can an unsecured creditor refuse a scaled-down settlement under a rehabilitation scheme approved by the Board for Industrial and Financial Reconstruction (BIFR) and wait to recover their full dues later? The Supreme Court of India recently addressed this critical question in a batch of appeals, clarifying the binding nature of such schemes on all creditors, including unsecured ones. This judgment has significant implications for insolvency law and the rights of creditors under the SICA. The bench comprised Justices M.R. Shah and Sudhanshu Dhulia, with the majority opinion authored by Justice M.R. Shah.

Case Background

The case involves a series of appeals arising from different High Courts, all centering on the same legal question: whether an unsecured creditor is bound by a rehabilitation scheme approved by the BIFR under the SICA. The lead case, Modi Rubber Limited vs. Continental Carbon India Ltd., involves a dispute where an unsecured creditor, Continental Carbon India Ltd., refused to accept the scaled-down payment offered under the rehabilitation scheme of Modi Rubber Limited, a company declared sick under SICA. The creditor sought to recover its full dues after the company’s rehabilitation. Similar issues arose in other cases, where unsecured creditors challenged the binding nature of the BIFR-approved schemes.

The core issue was whether unsecured creditors could opt out of a sanctioned scheme and wait for the company to recover financially before claiming their full dues, or whether they were bound by the scheme like all other creditors.

Timeline

Course of Proceedings

The High Court of Delhi, in the case of Continental Carbon India Ltd. vs. Modi Rubber Ltd., had ruled that an unsecured creditor could opt out of a rehabilitation scheme and wait to recover their full dues later. This decision was challenged in the Supreme Court. Subsequently, the High Court of Delhi in another case doubted the correctness of the decision in Continental Carbon India Ltd. and referred the matter to a larger bench. The High Court of Madhya Pradesh followed the Delhi High Court’s decision in Continental Carbon India Ltd., which was also challenged before the Supreme Court. These conflicting decisions from various High Courts led to the Supreme Court addressing the issue.

Legal Framework

The primary legal framework in this case is the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA). Key provisions include:

• Section 18 of SICA: This section deals with the preparation and sanction of rehabilitation schemes for sick industrial companies. It outlines the measures that can be included in a scheme, such as financial reconstruction, changes in management, and amalgamation. It also states that the scheme shall be binding on the sick industrial company, its shareholders, creditors, guarantors, and employees. Specifically, Section 18(8) states:
  
  “On and from the date of the coming into operation of the sanctioned scheme or any provision thereof, the scheme or such provision shall be binding on the sick industrial company and the transferee company or, as the case may be, the other company and also on the shareholders, creditors and guarantors and employees of the said companies.”
• Section 32 of SICA: This section provides that the provisions of a scheme framed under SICA shall override all other laws, except the Foreign Exchange Regulation Act, 1973, and the Urban Land (Ceiling and Regulation) Act, 1976. It states that a scheme shall override even the memorandum and articles of association of a sick industrial company.
• Section 19 of SICA: This section deals with financial assistance for the rehabilitation of sick companies. It requires the consent of entities providing financial assistance but does not require the consent of unsecured creditors for the scheme to be binding on them.
• Section 22 of SICA: This section provides for the suspension of legal proceedings against a sick company during the pendency of an inquiry or the implementation of a scheme.

The SICA was enacted to address the growing problem of industrial sickness in India and to provide a mechanism for the revival of potentially viable sick companies. The Act aimed to protect employment, optimize the use of funds from banks and financial institutions, and ensure the productive use of industrial assets.

Arguments

Appellant’s Arguments (Modi Rubber Ltd. and others):

• The appellants argued that the High Court erred in allowing unsecured creditors to opt out of the rehabilitation scheme. They contended that Section 18(8) of SICA makes the scheme binding on all creditors, including unsecured ones.
• They submitted that SICA is a special statute and a self-contained code, and its provisions should override general laws. They emphasized that the purpose of SICA is to revive sick companies, and allowing creditors to opt out would frustrate this purpose.
• The appellants argued that the scaling down of debts under a rehabilitation scheme is not a deprivation of property but a necessary measure to revive the company. They pointed out that if a company is wound up, unsecured creditors may not get anything.
• They also argued that the SICA does not require the consent of unsecured creditors for a scheme to be binding on them. The consent is only required from the entities providing financial assistance under Section 19.
• They submitted that the High Court’s interpretation of SICA was incorrect and that the scheme of SICA was to treat all creditors equally, with the exception of those providing financial assistance.
• The appellants further argued that the rehabilitation scheme under SICA discharges debt by operation of law and that SICA is not a consent-based regime but an operation-by-law-based regime.

Respondent’s Arguments (Continental Carbon India Ltd. and others):

• The respondents argued that there is no provision under SICA to compel an unsecured creditor to accept a scaled-down value of its dues. They contended that forcing them to accept less would violate Article 300A of the Constitution, which protects the right to property.
• They submitted that while SICA allows for preventive and remedial measures, it does not specifically authorize BIFR to deprive unsecured creditors of their full value of debt without their consent.
• They argued that the interpretation of SICA by the High Court was more workable and reasonable, and allowing creditors to stand outside the scheme would not prejudice the rehabilitation of a sick company.
• The respondents also argued that the BIFR had no authority to scale down the debts of an unsecured creditor without their consent, and that the Insolvency and Bankruptcy Code, 2016, specifically provides for dealing with unsecured creditors, whereas SICA does not.
• They contended that the scheme under SICA does not provide for making an unsecured creditor a part of the scheme without their consent, and that even if their consent is not required for sacrifices, they cannot be forced to become a part of the scheme.

Submissions of Parties

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether on approval of a scheme by the BIFR under the Sick Industrial Companies (Special Provisions) Act, 1985, an unsecured creditor has the option not to accept the scaled down value of its dues, and to wait till the scheme for rehabilitation of the respondent – sick company has worked itself out, with an option to recover the debt with interest post such rehabilitation?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Court considered the following authorities:

Judgment

The Supreme Court held that unsecured creditors are bound by the rehabilitation scheme approved by the BIFR under SICA and cannot opt out of it to recover their full dues later. The Court emphasized that the primary object of SICA is to revive sick companies, and this requires sacrifices from all stakeholders, including unsecured creditors.

The Court stated that Section 18(8) of SICA clearly states that the scheme is binding on all creditors, and there is no reason to treat unsecured creditors differently. The Court also noted that if a company is wound up, unsecured creditors may not receive anything, whereas a rehabilitation scheme allows them to recover at least a portion of their dues.

The Court rejected the argument that scaling down the debts of unsecured creditors is a violation of Article 300A of the Constitution. It held that the scheme is framed under the authority of law (SICA) and is therefore not a deprivation of property without authority.

The Court also clarified that the consent of unsecured creditors is not required for the scheme to be binding on them. The consent is only required from the entities providing financial assistance under Section 19.

The Court specifically overruled the High Court of Delhi’s decision in Continental Carbon India Ltd. vs. Modi Rubber Ltd., which had allowed unsecured creditors to opt out of the rehabilitation scheme.

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Navnit R. Kamani Vs. R.R. Kamani, (1988) 4 SCC 387: The Court relied on this case to emphasize that schemes under insolvency laws are binding on all creditors for larger public interest.
• Tata Motors Limited Vs. Pharmaceutical Products of India Limited and Anr., (2008) 7 SCC 619: The Court followed this decision to reiterate that SICA is a special statute and its provisions override general laws.
• Raheja Universal Limited Vs. NRC Limited and Ors., (2012) 4 SCC 148: The Court relied on this case to emphasize that matters related to the sanctioning and implementation of rehabilitation schemes fall exclusively within the jurisdiction of BIFR.
• NGEF Ltd. Vs. Chandra Developers (P) Ltd., (2005) 8 SCC 219: The Court referred to this case to reiterate that SICA is a special statute, which is a complete code in itself.
• Kanpur Fertilizers and Cement Limited Vs. State of Uttar Pradesh and Anr., (2018) 17 SCC 309: The Court referred to this case to emphasize that the scheme sanctioned by BIFR under section 18(4) is treated as conclusive evidence that all requirements relating to reconstruction or amalgamation have been complied with.
• Kotak Mahindra Finance Ltd. Vs. Mafatlal Industries Ltd., (2004) 5 Bom. CR 792: The Court referred to this case to emphasize that the scheme sanctioned by BIFR is binding on all creditors.
• Nasik People’s Co-operative Bank Ltd. Vs. Datar Switchgear and Anr., 2007 SCC Online Del 2067(DB): The Court referred to this case to emphasize that the scheme sanctioned by BIFR is binding on all creditors.
• Oman International Bank S.A.O.G. Vs. Appellate Authority for Industrial and Financial Reconstruction, (2010) 169 DLT 618 (DB): The Court referred to this case to emphasize that the scheme sanctioned by BIFR is binding on all creditors.
• International Finance Corporation, Washington Vs. Bihar Sponge & Iron Ltd. & Ors., AIR 2010 Del 142 (DB): The Court referred to this case to emphasize that the scheme sanctioned by BIFR is binding on all creditors.
• Union of India Vs. Cimmco Ltd. and Ors. reported in 2014 SCC OnLine Del 909: The Court referred to this case to emphasize that the scheme sanctioned by BIFR is binding on all creditors.
• Continental Carbon India Ltd. Vs. Modi Rubber Ltd., 2012 (131) DRJ 294 (DB): The Court specifically overruled this judgment, which had held that an unsecured creditor could opt out of a rehabilitation scheme.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily driven by the need to ensure the effective implementation of the Sick Industrial Companies Act, 1985 (SICA) and to prevent the frustration of its objectives. The Court emphasized the following points:

• Binding Nature of Rehabilitation Schemes: The Court stressed that the rehabilitation schemes sanctioned by the BIFR are binding on all stakeholders, including unsecured creditors, as per Section 18(8) of SICA. This was crucial to ensure that the schemes are workable and that the revival of sick companies is not hampered by dissenting creditors.
• Purpose of SICA: The Court highlighted that SICA was enacted to address the problem of industrial sickness and to facilitate the revival of potentially viable companies. Allowing unsecured creditors to opt out of the scheme would undermine this purpose and could lead to the failure of rehabilitation efforts.
• Equal Treatment of Creditors: The Court noted that SICA aims to treat all creditors equally, with the exception of those providing financial assistance under Section 19. There was no justification for treating unsecured creditors differently and allowing them to circumvent the binding nature of the scheme.
• Practical Considerations: The Court observed that if a sick company is wound up, unsecured creditors may not receive anything. Rehabilitation schemes, while requiring some sacrifices, offer a better chance for creditors to recover at least a portion of their dues. This practical consideration weighed heavily in favor of upholding the binding nature of the schemes.
• Overriding Effect of SICA: The Court reiterated that SICA is a special statute with an overriding effect over general laws. This was important to ensure that the rehabilitation process is not hindered by other legal provisions or individual creditor claims.
• Public Interest: The Court also considered the larger public interest, emphasizing that the revival of sick companies is essential for protecting employment, optimizing the use of funds from banks and financial institutions, and ensuring the productive use of industrial assets.

Sentiment Analysis of Reasons Given by the Supreme Court:

Fact:Law Ratio:

The Court’s decision was heavily influenced by legal considerations (70%), focusing on the interpretation of SICA and its overriding effect. The factual aspects (30%) of the case, such as the potential for unsecured creditors to recover some dues under a scheme, also played a role in the Court’s reasoning.

Logical Reasoning

Key Takeaways

• Unsecured creditors are bound by the rehabilitation schemes approved by the BIFR under SICA.
• Unsecured creditors cannot opt out of a scheme and wait to recover their full dues later.
• The primary objective of SICA is to revive sick companies, which requires sacrifices from all stakeholders.
• The scaling down of debts under a rehabilitation scheme is not a violation of Article 300A of the Constitution.
• The consent of unsecured creditors is not required for a scheme to be binding on them.
• The judgment overrules the Delhi High Court’s decision in Continental Carbon India Ltd. vs. Modi Rubber Ltd.

Directions

The Supreme Court directed that the rehabilitation scheme under Section 18 of the SICA shall bind all the creditors including the unsecured creditors and the unsecured creditors have to accept the scaled down value of its dues provided under the rehabilitation scheme.

Development of Law

The ratio decidendi of the case is that a rehabilitation scheme under Section 18 of the SICA is binding on all creditors, including unsecured creditors, and they cannot opt out of it to recover their full dues later. This judgment clarifies the position of law and overturns the earlier view taken by the Delhi High Court in Continental Carbon India Ltd. vs. Modi Rubber Ltd., which had allowed unsecured creditors to opt out of the scheme. The Supreme Court’s decision reinforces thebinding nature of rehabilitation schemes under SICA and ensures that the objective of reviving sick companies is not frustrated by dissenting creditors. This judgment will have a significant impact on the interpretation and implementation of SICA and will provide clarity on the rights and obligations of unsecured creditors in such schemes.