Revival of Sick Units Takes Precedence Over Loan Recovery

[The following post is contributed by Prachi Narayan of Vinod Kothari &
Company. She can be contacted at prachi@vinodkothari.com]
The Supreme Court in its judgment in the case of KSL
Industries Ltd vs. Arihant Threads Ltd
on October 27, 2014 finally settled
the position of law over the vexed issue of precedence of two special
enactments, the Sick
Industrial Companies (Special Provisions) Act, 1985 (“SICA”) and
the Recovery of Debt Due to Banks & Financial Institutions Act, 1993 (“RDDBFI”).
Since both the
enactments are special laws, there have been diverse views from the courts with
regard to precedence of one over the other. The lurking issue is finally resolved
with the unanimous judgement of the three judge bench of the Supreme Court which
upheld that the provisions of SICA shall prevail over the provisions of RDDBFI.
The Case
The facts of the case are that Arihant Threads Ltd
(Respondent) had availed a loan from IDBI Bank for its export-oriented spinning
unit set up in Amritsar, Punjab. The Respondent defaulted in payment of loan
installments and IDBI moved the Debt Recovery Tribunal (DRT), Chandigarh and
obtained an ex-parte order in its favour in July 2003 to dispose off the
Respondent’s assets. The Respondent stayed away from the DRT proceedings despite
having been given a chance to explain its position.
In September 2004, the movable and immovable properties of
the Respondent were valued accordingly and put for auction wherein KSL
Industries Ltd (Appellant) was declared the highest bidder.
The Respondent moved an application in DRT, Delhi for
settling the ex-parte order of DRT, Chandigarh in December 2004. DRT Delhi set
aside the auction sale holding that the properties of the Respondent were not
valued properly.
Subsequently, both the Respondent and the Appellant moved the Debt
Recovery Appellate Tribunal (“DRAT”), Delhi. DRAT Delhi stayed the ex-parte
order of DRT Chandigarh. Meanwhile, the Respondent invoked the provisions of
SICA by making the reference to Board
of Industrial Finance & Reconstruction
(BIFR). The DRAT Delhi
confirmed the sale in favor of Appellant.
However, before the sale formalities could be completed, the Respondent
filed two Writ Petitions in the Delhi High Court on the ground that the debt
recovery procedure cannot be carried out because of the prohibition in Section
22 of the SICA. The Delhi High Court allowed the writ petitions setting aside
the order of DRAT, Delhi. The Appellant preferred an appeal in the Supreme
Court where, the two-judge bench had a difference of opinion. Therefore, the
matter was referred to the three-judge bench that ruled that the debt recovery procedure is barred under
section 22 of the SICA, which shall prevail over Section 34 of the RDDBFI.
Analysis
This judgment surely puts
to rest the conundrum with regard to the precedence of one special enactment
over other special act and is also quintessential to the rules of
interpretation. The larger bench ruled that while addressing the precedence of
SICA and RDDBFI, in view of the
non obstante clause contained in both, one of the
important tests is to carefully examine the purpose of the two enactments, so
as to recognize and ensure that the purpose of both enactments is, as far as
possible, fulfilled.
The General Rules of Interpretation
It is a settled principle
of interpretation that a subsequent enactment has precedence over the previous
enactment Further, the doctrine of “generalia
specialibus non derogant
” (general provisions will not abrogate special provisions) is also well settled.
In the instant case, both
the principles became equally applicable and thus the confusion cropped up as
to which principle of interpretation would apply.
However, in cases where
such confusions spring up, the widely accepted rule of construction is that if
one construction leads to a conflict, whereas on another construction the two enactments
can be harmoniously construed, then the latter must be adopted.
The meaning of “Special”
Special in layman terms
would mean “something otherwise than usual” or something designed for a particular
purpose or occasion. It would not be a daunting task to ascertain when the base
for comparison is “generic or general”. It becomes complicated when the task is
to distinguish “the special” or “especial” between two specials.
The
Apex Court has carefully and at breadth examined the issue of “especial” and
addressed the same accordingly, laying down the determining factor to be the
purpose of the enactment and the subject matter it deals with.
In the case of LIC vs. DJ Bahadur,[1]
the Apex Court 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 particular perspective. For certain purposes,
an Act may be general and for certain other purposes it may be special and we
cannot blur distinctions when dealing with finer points of law
.”
The purpose of SICA is to
provide ameliorative measures for reconstruction of sick companies, and the
purpose of RDDBFI is to provide for speedy recovery of debts of banks and
financial institutions. Indeed both are special laws. With the purpose of
reconstruction and matters incidental thereto, SICA must be considered as
special law, though it may be a general law in relation to recovery of debts.
Whereas RDDBFI is a special law, in relation to recovery of debts and SICA may
be considered as general law.
In the above context,
the approach is to carefully examine the purpose, intention and objectives the enactment
aims so as to construe what is actually special and what becomes general.
Further, in order to
ascertain the real purpose of both the enactments and also to address the
ambiguity over why in this case the subsequent act would not prevail over the
previous act, a deeper look into the Statement of Objects and Reasons of both
enactments becomes imperative.
Statement of objects and
reasons of SICA
The introduction to SICA
states: “An Act to make, in the public
interest, special provisions with a view to securing the timely detection of
sick and potentially sick companies owning industrial undertakings, the speedy
determination by a Board of experts of the preventive, ameliorative, remedial
and other measures which need to be taken with respect to such companies and
the expeditious enforcement of the measures so determined and for matters
connected therewith or incidental thereto
.”
It is fairly clear from
the above that SICA was enacted in 1985
to provide for timely determination of a body of experts for providing
preventive and remedial measures that would need to be adopted to sick
companies so as to address the ill effects of sickness in industrial companies
such as loss of
production, loss of employment, loss of
revenue to the
governments and locking up of investible funds of banks and financial institutions. In order to
fully utilize the productive industrial assets, afford maximum protection of
employment and optimize the use of funds of the banks and financial
institutions, it was found imperative to revive and rehabilitate the
potentially liable sick industrial companies. Further the Act not only aims to
revive and rehabilitate all sick companies but those in the schedule to the
Industries (Development and Regulation) Act, 1951 (IDRA), that are presumably
vital to the economy of the nation.
In order to
achieve the purpose for revival and rehabilitation, protection of sick
companies from its creditors and the multitude of remedies which they may avail
of against the sick company and its properties, it was vital and imperative for
the BIFR to draw up a scheme best suited for the sick company. In this backdrop,
section 22 of SICA was enacted dealing with suspension of legal proceedings,
contracts, etc. during the continuation of BIFR proceedings.
Section 22 (1)
provides that “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
.”
The Appellants had put
forth that section 22 provides for stay on proceedings of winding up or
execution and distress and does not provide for any stay on the recovery of
debt process. The bench carefully examined the provision and ruled that the time
when SICA when enacted in 1985, recovery under RDDBFI was neither in existence
nor was such a mode contemplated. The section further was amended in 1994
include stay on suits for recovery of money or enforcement of security against
the sick company.
These
words appear to have been inserted to expressly provide, rather clarify that no
suits for the recovery of money, etc. would lie or be proceeded with against
such a company. Further, the bench concluded that the even though “proceedings”
under RDDBFI are not covered expressly but any proceeding resulting in the
execution and distress against the property of such company would be construed
as proceedings within the meaning of section 22.
Statement of objects and
reasons of RDDBFI
The introduction to RDDBFI as provided in the text of the Act
sets forth: “An Act to provide for the
establishment of Tribunals for expeditious adjudication and recovery of debts
due to banks and financial institutions and for matters connected therewith or
incidental thereto”
RDDBFI was enacted in 1993 by the Parliament to effectively address the
issue of recovery of debts due to banks and locking of investible public funds
that prevented proper utilization and recycling of funds for development of
country. The urgent need to work
out a suitable mechanism, through which the debts of banks and financial
institutions could be realized without delay, was in the form of Special
Tribunals, which would follow a summary procedure for adjudication. These
Tribunals eventually came to be known as Debt Recovery Tribunals, which
precisely was the intent behind enactment of RDDBFI. 
However, in view of
multiple remedies under various other laws for recovery of money and order to
protect the sanctity of proceedings and uphold the objectives for speedy
recovery of debts, exclusive protections in form of section 18 and 34 were
cautiously inserted by the Parliament.
Section 34 of RDDBFI
provides “ (1) Save as provided under sub-section
(2), the provisions of this Act shall have effect notwithstanding anything
inconsistent therewith contained in any other law for the time being in force
or in any instrument having effect by virtue of any law other than this Act.
(2) The provisions of this Act or the rules made thereunder shall be
in addition to, and not in derogation of, the Industrial Finance Corporation
Act, 1948 (15 of 1948), the State Financial Corporations Act, 1951 (63 of
1951), the Unit Trust of India Act, 1963 (52 of 1963), the Industrial
Reconstruction Bank of India Act, 1984 (62 of 1984), the Sick Industrial
Companies (Special Provisions) Act, 1985 (1 of 1986) and the Small Industries
Development Bank of India Act, 1989 (39 of 1989).”
Sub-section 1 as stated
above is a saving as well as a non-obstante clause conferring an overriding effect
of the provisions of the RDDB over other laws for the time being in force,
while sub-section 2 is in addition to and not in derogation of the special
statues as provided for. Further, it is pertinent to note here that reference
to SICA and the Small Industries Development Bank of India Act, 1989 (39 of
1989), was inserted with effect from 17.01.2000 by Act No. 1 of 2000 of the
Parliament.
Sub-section 1 starting with
save as provided in sub-section 2 ”,
is a saving clause. According to Black’s Law Dictionary[2]A saving clause in a statute is an exception
of a special thing out of the general things mentioned in the statute; it is
ordinarily a restriction in a repealing act, which is intended to save rights,
pending proceedings, penalties, etc., from the annihilation which would result
from an. unrestricted repeal”
The meaning as set forth
above clearly carves an exception for sub-section 2, thereby preserving the
contents and interpretations as stated therein.
Further, upon cursory and
plain reading of language of sub-section 2, it is fairly clear that when an Act
provides that its provisions shall be in addition to and not in derogation of
another law or laws, it means that the legislature intends that such an
enactment shall co-exist along with the other Acts. Further, the act of the
legislature to further amend and include SICA within the purview was also to be
construed as per principles of co-existence. It is clearly not the intention of
the legislature, in such a case, to annul or detract from the provisions of
other laws.
It is herein important to
construe the meaning of the phrase “not
in derogation of
”. Black’s Law Dictionary[3]
defines derogation as “The partial repeal
or abolishing of a law, as by a subsequent act which limits its scope or impairs
its utility and force. Distinguished from abrogation, which means the entire
repeal and annulment of a law”

In view of the above, it is undoubtedly clear that the subsequent Act
cannot be in nature of limiting the scope of relief as provided under the
previous act. It necessarily has to provide an impetus to the objectives of the
previous act and not vitiate the same. The express inclusion of the phrase “not
in derogation of”
in
sub-section 2 of section 34 of RDDBFI undoubtedly establishes that the
legislature never intended to undermine the force and utility of SICA by
enacting RDDBFI but rather intended to preserve the powers of the authorities
under the SICA and save the proceedings from being overridden by the subsequent
enactment i.e. the RDDBFI.
Conclusion
Even though the
judgment settles the issue of precedence of SICA over RDDBFI, the implications
are far-reaching and wide. Any defaulter could possibly apply to BIFR for
reconstruction thus delaying debt recovery process and with courts frequently
staying the recovery proceedings it would adversely affect the recovery climate
in the country. Further, it would also largely affect the value of the
collateral and its enforceability, as litigation as all know is a time consuming
affair in the country. This clearly indicates that banks and financial
institution would now have to bear the brunt of more bad loans.
It is further disheartening to see that legislation dating back as
early as 1980 and 1990s are found contradicting three decades after. It surely
indicates that drafting was ill-considered leaving it to the interpretation of
the courts each time leading to severe inefficiencies in the implementation of
the legislation.
Prachi Narayan



[1] (1981) 1 SCC 315
[2] http://thelawdictionary.org/saving-clause/
[3] http://thelawdictionary.org/derogation/

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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