Supreme Court Resolves Conflict Between Companies Act and SICA

[The following guest post is contributed by Aditi Jhunjhunwala, who is a partner at
Vinod Kothari & Co. The author can be contacted at aditi@vinodkothari.com.]
In a recent ruling in
the case of Madura Coats Limited v. Modi Rubber Ltd. & Anr., the question before the Supreme
Court on appeal was: where an order for winding up is passed under the
Companies Act and the company has made a reference before the Board for
Industrial and Financial Reconstruction (BIFR) which is registered, can the
company take shelter under section 22 of Sick Industrial Companies Act, 1985
(SICA) (that relates to suspension of legal proceedings and contracts)? The
Court upheld the argument and ruled that the very scheme of law is that the
revival of company must be first resorted to rather than putting it to death.
In paragraph 20 the Court observed that:
“The
legislative intention is to ensure that no proceedings against the assets of
the company are taken before any decision is taken by the BIFR because if the
assets are sold or the company is wound up, it may become difficult to later
restore the status quo ante.”
This post highlights some of the important issues that arise
from the ruling.
Overriding effect of SICA
Section 22 of SICA is a
non-obstante clause providing that any other legal proceedings under any other
law in connection with the industrial company shall not be proceeded with any
further and that a winding up order, if any, will also be stayed where a
reference has been made before the BIFR. A similar issue was raised in the
present case as well where Modi Rubber resorted to the making of an application
before BIFR while the Court had passed the winding up order against it on an
application made by Madura Courts Limited. However, the very scheme of law is
that it does permit such an action by a company whereby it may use this leeway
and take shelter under section 22 of SICA wherein the provisions of SICA would
prevail over Companies Act. Similar decisions have been rendered in the case of
Tata Motors Ltd v. Pharmaceutical
Products of India Ltd.
, (2008) 7 SCC 619 and Real Value Appliances
Ltd. v. Canara Bank
,
(1998) 5 SCC 554, which were relied upon by the
Modi Rubber in the instant case.
The High Court however
did not take into consideration the contention of Modi Rubber citing that what
is important is not the date of filing the application with BIFR but the date
of registration of the application, which in the present case was after the
date of the passing of the winding up order. However, the Court thereafter took
into consideration the subsequent events, namely the fact of registration of
the reference and relying upon Rishabh Agro Industries Ltd. v.
P.N.B. Capital Service Ltd.
,
(2000) 5 SCC 515 it was held that Modi Rubber was entitled to the benefit of
the provisions of Section 22 of the SICA. The High Court also held that a winding up order passed under the
Companies Act, 1956 is not the culmination of the proceedings pending before
the Company Court. The final order to be passed in the winding up proceedings
is an order of dissolution of the company under Section 481 of the Act.      
Abuse of process of law
It was argued by Madura
Courts that since the reference before BIFR got registered only after passing
of the order of the winding up by the Court, Modi Rubber cannot take shelter
under SICA and that the order for winding up should prevail. However, the Court
based on various judicial pronouncements and the scheme of law discussed that
the scheme is such that the company must be first allowed for revival and that
only then should the period of moratorium begin. Although this scheme seems to
be in the spirit of things, this provision being overriding in nature over
other laws may be used as a protracting device by companies at times. The
provisions of SICA prevailing over the winding up order has always been
controversial. In paragraph 25 of the ruling the Court discussed that it could
not be said that the provisions of Section 22 of the SICA would not be
attracted after an order of winding up is passed.
In fact the Court in
paragraph 20 lamented that although at times it may seem that the provision of
law may be used but may cause abuse of process of law, however, the Court
cannot do anything about the same as the same is for the legislature to take
appropriate steps. Therefore, this become obvious that the Court also
acknowledges the fact that the provisions of law could be misused as well.
Provisions under the Bankruptcy Code
The provisions of the
Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the “Code”)
provides for corporate insolvency process. Once the Code comes into force, the
Sick Industrial Companies (Special Provisions) Repeal Act, 2003 will be
enforced. Once the said Act gets enforced, SICA being the principal legislation
will lose its existence. Therefore, the revival of companies will not be
possible under SICA. Currently, sections 253 to 269 of the Companies Act, 2013
provide for revival of companies; however, the said sections are not yet
enforced. Therefore, once SICA gets repealed one would have to take shelter
under the Companies Act, 2013. However, with the Code coming into force, these
sections will get omitted as one will have to proceed for revival under Chapter
II of the Code.
Once an application under the Code is admitted by the
National Company Law Tribunal (NCLT), all the proceedings under other laws will
be stayed until the moratorium period under the Code.

Aditi Jhunjhunwala

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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