Introduction

Questions around the interplay between the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002, the Sick Industrial Companies (Special Provisions) Act 1985, the Recovery of Debts Due to Banks and Financial Institutions Act 1993 and the Companies Act 1956 have frequently arisen in various high courts and the Supreme Court.

In a recent decision by the Supreme Court in M/S Madras Petrochem Ltd v BIFR,(1) this interplay was exhaustively revisited. In particular, the Supreme Court considered whether the protection available to a sick industrial company under Section 22 of the Sick Industrial Companies (Special Provisions) Act overrides the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002. Section 22 of the Sick Industrial Companies (Special Provisions) Act stipulates that if a company is registered as a sick industrial company with the Board of Industrial and Financial Reconstruction (BIFR), all other legal proceedings against the company will be suspended and cannot be resumed without the BIFR's permission.

Facts

In 1989 Madras Petrochem Ltd was declared a 'sick unit' by the BIFR in accordance with the Sick Industrial Companies (Special Provisions) Act.(2) The operating agency's efforts to revive Madras Petrochem were unsuccessful. Therefore, the BIFR recommended to the Bombay High Court that Madras Petrochem be declared insolvent.

Madras Petrochem challenged the BIFR's order before the Appellate Authority for Industrial and Financial Reconstruction (AAIFR), but its plea was dismissed in 2002. Its appeal against the AAIFR's order before the Delhi High Court was also eventually dismissed.

The Delhi High Court held that as per Section 15(1), Proviso 3 of the Sick Industrial Companies (Special Provisions) Act, a reference pending before the BIFR shall abate if secured creditors representing 75% or more of the borrower's total debts have initiated action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act to recover their debts, as was the case in Madras.(3) Madras Petrochem filed an appeal before the Supreme Court against the Delhi High Court's order.

Simultaneously, the appeal against the secured creditor's action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act – which was challenged before the Debt Recovery Tribunal, Chennai – was confirmed by the Madras High Court on appeal. The Madras High Court permitted the secured creditors to proceed with the sale of the securities subject to ensuring a minimum reserve sale price.

In the insolvency proceedings against Madras Petrochem, the Bombay High Court subsequently modified its earlier order and restrained the official liquidator from taking possession of Madras Petrochem's assets, while permitting the secured creditors to proceed under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act.

Questions of law

The case addressed the following questions of law:

  • whether the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act overrides the Sick Industrial Companies (Special Provisions) Act; and
  • whether the term 'where a reference is pending' in Section 15(1), Proviso 3 of the Sick Industrial Companies (Special Provisions) Act should be interpreted to mean all proceedings pending before the BIFR or only the initial stage of filing and registering a reference before the BIFR.

Decision

In a meticulous and exhaustive decision, the Supreme Court held as follows.

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act prevails

The Recovery of Debts Due to Banks and Financial Institutions Act and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act refer to 'creditor's interest', whereas the Sick Industrial Companies (Special Provisions) Act refers to 'interests of the debtor company'. While all three acts have been enacted to serve the public interest, in the event of a conflict between the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act and the Sick Industrial Companies (Special Provisions) Act, the legislative intent is clearly for the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act and the 'creditor's interest' to prevail.

Suspension of legal proceedings

The suspension of legal proceedings against a sick industrial company under Section 22 of the Sick Industrial Companies (Special Provisions) Act will continue for unsecured creditors seeking to recover their debts from a sick industrial company because the act overrides the Recovery of Debts Due to Banks and Financial Institutions Act.

However, a secured creditor which enforces its security under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act to recover debts against a sick industrial company will be unhindered by Section 22 of the Sick Industrial Companies (Special Provisions) Act.

Enforcement of security

In cases where there is more than one secured creditor of a sick industrial company, Section 22 of the Sick Industrial Companies (Special Provisions) Act will prevent the enforcement of security only when the action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act is for an amount that is less than 60% of the total value of the sick industrial company's secured debts.

Accordingly, in cases where the amount is at least 60% of the total value of the sick industrial company's secured debts, the enforcement of security by the secured creditors without court intervention will be unhindered by Section 22 of the Sick Industrial Companies (Special Provisions) Act.

In cases where the amount is at least 75% of the total value of sick industrial company's secured debts, the reference of the sick industry with the BIFR will stand abated and the borrower entity will no longer enjoy sick industrial company status.

Comment

The Supreme Court's judgment is reassuring for secured creditors and comes at a time when defaulting loans and non-performing assets are at an all-time high. The decision clarifies that the right of secured creditors to enforce securities to recover outstanding dues without court intervention overrides other legislation that touches on the rights of creditors and borrowers.

Although the Supreme Court's decision reflects what has been common practice for some time, the decision will help to put the issue to rest and prevent frivolous attempts by insolvent debtors to stall recovery proceedings under the Sick Industrial Companies (Special Provisions) Act.

For further information on this topic please contact Jyoti Singh or Arushi Mishra at Phoenix Legal by telephone (+91 22 4340 8500) or email (jyoti.singh@phoenixlegal.in or arushi.mishra@phoenixlegal.in). The Phoenix Legal website can be accessed at www.phoenixlegal.in.

Endnotes

(1) 2016 SCC SC 86.

(2) Industrial companies whose net worth is eroded may approach the BIFR seeking sick industrial company status under the Sick Industrial Companies (Special Provisions) Act.

(3) The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act is India's central legislation which, among other things, empowers secured creditors such as banks, notified public financial institutions and registered securitisation and asset reconstruction companies to enforce securities furnished by borrowers without court intervention.

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