India: Supreme Court Clarifies: Recovery Application By Banks Stayed Against Sick Company

  • A three judge bench of the Supreme Court holds that the immunity under Section 22 of Sick Industrial Companies (Special Provisions) Act, 1985 would also extend to a recovery application made under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993;
  • Supreme Court states that the principle of giving effect to the intention of legislature is to be given precedence over the doctrine of generalia specialibus non derogant;
  • Bank and Financial Institutions cannot proceed against a Sick Company.

INTRODUCTION

The Supreme Court recently in KSL and Industries Limited ("KSL") v. M/s Arihant Threads Limited ("Arihant") and Others1 has held that the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985 ("SICA") shall prevail over the provision for the recovery of debts in the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 ("RDDBFI"). It has been observed that the bar under Section 22 of the SICA is very much applicable to a recovery application filed under RDDBFI.

BACKGROUND

The appeal was placed before the three judge bench of the Supreme Court by way of reference made by a two judge bench of the Supreme Court speaking through C.K Thakker and Altamas Kabir JJ. In the two judge bench judgment under consideration, Justice Thakker had opined that in view of an overriding clause in Section 34 of RDDBFI, the provisions of RDDBFI is to be given priority and primacy over SICA as Section 34 has been inserted through a latter enactment. However, Justice Altamas Kabir observed that in view of a specific exception to Section 34 (1) carved out in Section 34 (2) which states that the provisions of RDDBFI Act shall be in addition to and not in derogation of SICA, it is clear that the intention of legislature was that SICA would prevail over RDDBFI.

FACTUAL MATRIX

Arihant had set up an export oriented spinning unit for manufacturing cotton yarn in Amritsar District in the State of Punjab. It had taken a loan by way of foreign currency and a working capital to the tune of INR 93.1 million from Industrial Development Bank of India ("IDBI"). IDBI filed an application before the Debt Recovery Tribunal, Chandigarh ("DRT") for recovery of the debt when Arihant failed to repay loan installments. DRT ordered an ex-parte order in favour of IDBI directing a recovery of INR 252.6 million along with interest at the rate of 7.8 % per annum and in the event of failure on the part of Arihant to pay the aforementioned amount, IDBI was entitled to sell the mortgaged property of Arihant. Pursuant to the failure of Arihant to pay, the recovery officer fixed the reserve price of the mortgaged properties at INR 125 million and KSL was declared to be the highest bidder in the auction sale. Arihant filed an appeal before the DRT seeking to set aside the auction sale. DRT-I Delhi allowed the prayer of Arihant subject to Arihant making a payment of a certain amount.

Arihant inter alia filed an appeal before the Debt Recovery Appellate Tribunal, Delhi ("DRAT") against the order of the DRT-I Delhi. In the meanwhile, Arihant invoked the provisions of SICA and applied for a reference to the Board of Industrial and Finance Reconstruction ("BIFR"). Subsequent to which the DRAT confirmed the auction sale in favor of KSL. Arihant moved the Delhi High Court vide writ petitions against the order of the DRAT which was allowed by the Delhi High Court on the ground that in view of the express bar of Section 22 of SICA, the recovery proceedings cannot be pursued against Arihant and no order ought to have been passed by the DRAT. The High Court's Order was challenged in the Supreme Court by KSL.

ISSUES

  • Whether the bar under Section 22 of the SICA would be applicable in view of a non-obstante clause in Section 34 of the RDDBFI?
  • Whether the doctrine of generalia specialibus non derogant is to be made applicable while interpreting two special statutes containing non-obstante clauses?

JUDGMENT AND JUDICIAL REASONING

The three judge bench of the Supreme Court speaking though S.A Bobde J has held that the provisions of Section 22 of SICA would prevail over the provision for the recovery of debts in the RDDBFI and that the doctrine of generalia specialibus non derogant is not to be given a mechanical application; rather the interpretative rule of giving effect to the intention of the legislature is to be made applicable.

The reasoning of the Supreme Court is stated as follows:

  • SICA confers wide powers on the BIFR like providing for amalgamation of the sick industrial company with a transferee company, sale or lease a part of the industrial undertaking, the rationalization of managerial personnel, supervisory staff and workmen and other preventive and remedial measures2 and hence Section 22 of SICA is to be given a purposive and wider interpretation in light of the purpose of its enactment being to be able to adopt timely preventive, ameliorative and remedial measures to rehabilitate sick industrial companies.3
  • In view of the express mention of no proceedings for "execution, distress or the like against any of the properties of the industrial company" and "no suit for recovery of money or for enforcement of any security" in Section 22 of the SICA, it is clear that the legislative intent is to protect the properties of the sick industrial company from being proceeded against by its creditors or levy execution of distress against its creditors.4
  • Section 34 (2) of the RDDBFI is in the nature of an exception to Section 34 (1) by virtue of a saving provision in Section 34 (1) and it provides that the provisions of RDDBFI and the rules made under it shall be in addition to and not 'in derogation of'5 SICA. Hence, one has to give effect to the intention of the legislature by interpreting Section 22 so as to preserve the power of the BIFR under SICA and save the proceedings from being overridden by a latter enactment.
  • The Supreme Court relied upon the observations made in LIC v. D.J Bahadur6 wherein it has been held that in determining whether a statute is a special or a general one, the focus must be on the principal subject-matter plus the perspective. For certain purposes, an act may be general and for certain other purposes it may be special. S.A Bobde J. observed that the purpose of SICA is to provide for ameliorative measures for reconstruction of sick companies whereas that of RDDBFI is to provide for speedy recovery of debts due to banks and financial institutions. However, with specific reference to the purpose of reconstruction of sick companies, SICA must be held to be special law.

ANALYSIS

The three judge bench of the Supreme Court has applied the purposive rule of interpretation and has not gone by the general rule of interpretation that in case a non-obstante clause is present in two enactments, the later Act must prevail.7 However, the implications of the judgment are that the second generation banking reforms brought about by enactment of RDDBFI in order to reduce the Non-Performing Assets could be derailed. A company which is unable to pay its debts may apply to BIFR for taking remedial measures and in that event the bar of Section 22 would apply resulting into suspension of recovery proceedings.

However, it will be interesting to see whether the bar of SICA would also extend to a proceeding under Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ("SARFAESI") particularly when there is no exception to the non- obstante clause in Section 35 of SARFAESI. In view of Section 37 of SARFAESI whereby it is stated that the provisions of SARFAESI would be in addition to and not in derogation of RDDBFI, the bar of Section 22 of SICA may also extend to a proceeding under SARFAESI following the reasoning adopted by the three judge bench of the Supreme Court.

Footnotes

1. [2014] 123 CLA 198 (SC)

2. See Section 18 f SICA

3. See Statement of Objects and Reasons of SICA

4. Supra note 1, para 29

5. Black's Law Dictionary has defined Derogation to mean partial repeal or abrogation of law by a latter act that limits its scope or impairs its utility and force. Ibid, para 37

6. (1981) 1 SCC 315

7. See Allahabad Bank v. Canara Bank, (2000) 4 SCC 406, Maharashtra Tubes Ltd v. State Industrial & Investment Corpn. Of Maharashtra Ltd, (1993) 2 SCC 144

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Singh & Associates
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Singh & Associates
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions