A rehabilitation scheme sanctioned under Sick Industrial Companies Act, 1985 binds all creditors: Supreme Court

JSA successfully obtained the dismissal of an appeal filed against Singer India Ltd. (“Singer“).

The appeal challenged an order (“Impugned Order“) passed by the Delhi High Court in a writ petition (“Writ“) filed by Singer. Vide the Impugned Order, the Division Bench of the High Court had referred the Writ to a larger bench as it doubted the correctness of the judgment in Continental Carbon India Ltd. v. Modi Rubber Ltd., 2012 (131) DRJ 291 (DB) (“Modi Rubber”).

The issue before the Supreme Court was “Whether on approval of a rehabilitation scheme under the Sick Industrial Companies (Special Provisions) Act, 1985 (“SICA“), an unsecured creditor has the option not to accept the scaled down value of its dues, and to wait till the scheme for rehabilitation has worked itself out, with an option to recover the debt with interest post such rehabilitation?”

The Supreme Court accepted all the submissions made by JSA on behalf of Singer and decided in its favour. The Supreme Court held that once a rehabilitation scheme is sanctioned by the Board for Industrial and Financial Reconstruction (“BIFR”), which may include scaling down the value of dues of the unsecured creditors, the same shall bind all creditors including the unsecured creditors. The Supreme Court further held that:

  • SICA is a remedial and ameliorative enactment. It aims for the revival and rehabilitation of potentially viable sick industrial companies.
  • Unsecured creditors cannot obstruct the rehabilitation of a financially distressed company by refusing to accept the reduced value of their outstanding dues. Such unsecured creditors cannot wait until the rehabilitation scheme has taken effect, with the option of recovering their debt post-rehabilitation.
  • A sick company, which has been able to revive because of the scaling down the value of the dues, may again become sick, if the entire dues of the unsecured creditors are to be paid thereafter.

The Supreme Court held that the view taken in Modi Rubber is erroneous and contrary to the scheme of SICA and quashed the same.

Our Dispute Team Lead Partner – Amar Gupta, Partner – Divyam Agarwal, and Associate – Pranav Tanwar.