M/S. MADURA COATS LTD. Vs. M/S. MODI RUBBER LTD. & ANR.

Supreme Court of India (Full Bench (FB)- Three Judge)

Appeal (Civil), 1475 of 2006, Judgment Date: Jun 29, 2016

REPORTABLE

IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 1475 OF 2006

M/s. Madura Coats Limited ...... Appellant

M/s. Modi Rubber Ltd. & Anr. …..Respondents

J U D G M E N T

Madan B. Lokur, J.

1. The appellant (Madura Coats) is aggrieved by the judgment and order
dated 20th May, 2004 passed by the Division Bench of the Allahabad High
Court in Special Appeal No. 420 of 2004. By the impugned judgment and order
the Division Bench of the High Court allowed the Special Appeal of the
respondent and stayed further proceedings before the Company Court
consequent upon a winding up order passed against the respondent (Modi
Rubber) till a final decision is taken on a reference made by Modi Rubber
to the Board for Industrial and Financial Reconstruction.
2. Company Petition No.1 of 2002 was filed by Madura Coats in the
Allahabad High Court for winding up Modi Rubber on the allegation that Modi
Rubber was unable to pay its huge undisputed debts. Notice was issued in
the Company Petition to Modi Rubber who entered appearance but took several
adjournments in the matter on one pretext or the other including furnishing
the schedule for repayment of the admitted dues to the creditors, an
arrangement being worked out with Apollo Tyres Ltd. and various other
reasons.
3. Eventually, after two years of adjournments, the Company Court
declined to grant any further adjournment to Modi Rubber. Accordingly, on a
consideration of the material on record and after hearing learned counsel
for the parties, the Company Court passed an order on 12th March, 2004
holding that Modi Rubber was unable to pay its undisputed debts and that it
was just and equitable that the company be wound up. An Official
Liquidator was appointed to take charge of the assets of the company and to
submit a report along with the inventory.
4. Feeling aggrieved by the winding up order, Modi Rubber preferred an
appeal before the Division Bench of the High Court which was allowed by the
impugned judgment and order.
5. Before the Division Bench it was brought out for the first time that
on 6th December, 2003 the Board of Directors of Modi Rubber had passed a
resolution to file a reference before the Board of Industrial and Financial
Reconstruction (for short ‘the BIFR’) under the provisions of the Sick
Industrial Companies (Special Provisions) Act, 1985 (for short ‘the SICA’).
6. Pursuant to the aforesaid resolution, an application was made by
Modi Rubber to the BIFR on 3rd February, 2004 which was received by the
BIFR on 4th February, 2004. Thereafter, the application was scrutinized
and on 17th March, 2004 the reference made by Modi Rubber was registered as
Case No. 153 of 2004. It will be seen that while the application for
making a reference was sent to the BIFR before the winding up order was
passed by the Company Court, the reference was actually registered after
the winding up order was passed by the Company Court.
7. On these broad facts, it was contended by Modi Rubber before the
Division Bench that in view of the decision of this Court in Real Value
Appliances Ltd. v. Canara Bank[1] on filing an application before the BIFR,
all proceedings in respect of the company ought to have been stayed in
terms of Section 22 of the SICA. Consequently, even the Division Bench of
the High Court could not have decided the appeal filed by Modi Rubber. This
contention was rejected by the High Court and it was held that the crucial
date for a stay of proceedings under Section 22 of the SICA is the date on
which the reference is registered with the BIFR and not the date on which
an application for reference is filed.
8. However, the High Court 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.[2] it was held
that Modi Rubber was now entitled to the benefit of the provisions of
Section 22 of the SICA. It was also held that a winding up order passed
under the Companies Act, 1956 (for short ‘the Companies Act’) 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.
9. Under the circumstances, the High Court set aside the winding up
order passed by the Company Court and further directed that the proceedings
before him shall remain in abeyance till the disposal of proceedings before
the authorities under the SICA.
10. Leave to appeal against the judgment and order of the High Court was
granted on 24th February, 2006 and the following order passed:

“Leave granted.
Whether the Board of Industrial and Financial Reconstruction should
entertain a reference made by a sick company in terms of Section 15 of the
Sick Industrial Companies (Special Provisions) Act, 1985, (‘SICA’) after
the company had already been directed to be wound up by a Company Judge in
a matter which was pending before the Court for 2 years, vis-à-vis Section
22 of the Act is in question in this appeal, which arises out of the
judgment and order dated 20.05.2004 passed by the Division Bench of the
High Court of Judicature at Allahabad in Special Appeal No. 420/2004. Our
attention has been drawn to a Division Bench decision of this Court in
Rishabh Agro Industries Ltd. v. P.N.B. Capital Services Ltd., (2000) 5 SCC
515, wherein this Court opined that the reference in terms of Section 15 of
SICA can be made even after passing of the winding up order. The
correctness of the ratio of the said decision has been questioned before
us. We are inclined to think that there is merit in the challenge to the
correctness of the view taken therein. We are also of the opinion that the
proposition of law stated in the said decision of this Court may require
reconsideration having regard to Section 20 of the Act and the object and
scope of SICA vis-à-vis the provisions of the Companies Act. We are,
therefore, of the opinion that the matter be referred to a larger Bench.
Let the records of the case be placed before Hon’ble the Chief Justice of
India for constitution of a larger Bench.
Hearing of the appeal is expedited. Liberty to mention.”

It is under these circumstances that this appeal has been placed before us
for consideration.
11. During the hearing of this appeal, further facts were placed before
us. It was pointed out that the reference made by Modi Rubber to the BIFR
was challenged by Madura Coats by filing Civil Misc. Writ Petition No.
17870 of 2004 in the Allahabad High Court. A view was taken by the High
Court in its order dated 10th May, 2004 that the writ petition was
premature and the maintainability of the reference could be raised by
Madura Coats before the BIFR. Under the circumstances, the High Court did
not consider it proper to entertain the writ petition which was accordingly
dismissed.
12. Following upon the order passed by the High Court, Madura Coats
moved an application before the BIFR on or about 12th January, 2006 in
which it was prayed that Madura Coats be impleaded as a party in the
proceedings and that its dues with interest thereon be included as a
pressing creditor in the rehabilitation scheme. It is not clear whether any
formal order was passed impleading Madura Coats in the proceedings before
the BIFR, but in any event, it does appear from the record that Madura
Coats participated in the proceedings before the BIFR.
13. We were told by learned counsel for Modi Rubber that before the BIFR
a Draft Rehabilitation Scheme (DRS) for revival of the company was filed
and advertised on 18th January, 2008. In connection with the DRS, the
summary record of proceedings of the BIFR of 8th April, 2008 notes the
presence of the advocate for Madura Coats in paragraph 7.20 and records the
submission that Madura Coats does not agree for a settlement at 30% of the
admitted amount as proposed. The BIFR also noted in paragraph 7.38.1 that
objections to the DRS were raised by some employees, unsecured creditors
and a few governments/government agencies. It was also noted that
unsecured creditors have to fall in line with the provisions of the
rehabilitation scheme in the interest of revival of Modi Rubber.
14. Paragraph 7.38.1 of the summary record of proceedings read as
follows:-

“7.38.1 Objections were raised by some employees, unsecured creditors and a
few Governments/Government agencies. It is very important that the
interest of the employees is safeguarded and employment is protected while
reviving the company. The terms for settlement of the dues of the workers
should not be inferior to the terms offered for settlement of the dues of
the secured creditors. Unsecured creditors have to fall in line with the
provisions of the rehabilitation scheme in the interest of revival of the
company in respect of Government/Government agencies who objected to the
DRS, the words “to consider” have to be stipulated in the DRS. DB and
Arsec (I) Ltd., the two secured creditors who raised objections have agreed
to settle the matter with the company.”

15. The BIFR finally issued certain directions, one of which was
sanctioning the rehabilitation scheme under Section 19(3) and 19(4) of SICA
for implementation by all concerned. As far as the unsecured creditors are
concerned (and this includes Madura Coats), the rehabilitation scheme
provided for acceptance of the outstanding dues as per one of the following
three options:

“a) To accept 30% of the principal outstanding as full and final payment.
The payment shall be made within 3 months of the sanction of the scheme by
the BIFR; or

b) To accept 40% of the principal outstanding as full the final payment.
The payment shall be made in 3 equal annual installments from the cut off
date (i.e. 31.03.2008). The first installment shall be payable within 3
months of the sanction of the scheme by the BIFR; or

c) To accept 50 % of the principal outstanding as full and final payment.
The payment shall be made in one go at the end of 3rd year from the
sanction of the Scheme by the BIFR.”

We were told that Madura Coats did not challenge the rehabilitation scheme.
16. Under the circumstances, Modi Rubber addressed a letter to Madura
Coats on 3rd September, 2008 informing the approval and sanction of the
rehabilitation scheme by the BIFR and indicating the three options
available to Madura Coats for clearing the outstanding dues. It seems that
no reply was received by Modi Rubber to this communication. Accordingly,
Modi Rubber sent another communication to Madura Coats on 12th August, 2011
reminding it to accept the settlement. In this communication, it was also
mentioned that one raw material supplier had challenged the settlement
terms by filing an appeal before the Appellate Authority for Industrial and
Financial Reconstruction but that it had lost in the appeal.
17. Learned counsel for Modi Rubber brought to our notice a few orders
passed by the Company Court after the approval and sanction of the
rehabilitation scheme. These orders which have been placed on record
suggest that Modi Rubber was willing to pay the dues to Madura Coats in
terms of the rehabilitation scheme and that the liability, according to
Modi Rubber was Rs. 2.73 crores while according to Madura Coats the
liability was more than Rs. 4.00 crores. By an order dated 16th November,
2011 Modi Rubber was directed by the Company Court to pay an amount of Rs.
1.50 crores to Madura Coats within one month. This payment of more than
50% of the dues was made to Madura Coats by a cheque on 15th December,
2011. We were told by learned counsel for Modi Rubber that the cheque was
encashed by Madura Coats on 19th December, 2011.
18. The correctness of the impugned judgment and order will need to be
tested on these facts and the law placed before us in connection with the
reference made to the larger Bench. On hearing learned counsel for the
parties on these facts, we are of the opinion that different situations can
arise in the interplay between the Companies Act and the SICA in the matter
of winding up of a company and these situations have already been dealt
with by this Court at one time or another.

19. One such situation is where winding up proceedings are pending and a
reference is made to the BIFR. This situation occurred in Real Value where
winding up proceedings were pending and the appointment of a provisional
liquidator was under challenge. At that stage, steps were taken by Real
Value for making a reference under Section 15 of the SICA to the BIFR.
Under these circumstances, one of the questions agitated for consideration
by this Court was whether on the registration of a reference, the Division
Bench of the High Court could pass orders in an appeal against an interim
order passed by the Company Court.
20. While referring to the provisions of the SICA, this Court concluded
that once a reference is registered after scrutiny, it is mandatory for the
BIFR to conduct an enquiry. It was also held that the SICA is intended to
revive and rehabilitate a sick industry before it can be wound up under the
Companies Act. 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. It was held that it
is for this reason that the enquiry under Section 16 of the SICA must be
treated to have commenced as soon as the registration of the reference is
completed after scrutiny and that action against the company’s assets must
remain stayed in view of Section 22 of the SICA till a final decision is
taken by the BIFR. This is what this Court said in paragraph 23 of the
Report:

“It is argued that if the reference before the BIFR is only at the stage of
registration under Section 15, then Section 22 is not attracted. This
contention, in our opinion, has no merit. In our view, when Section 16(1)
says that the BIFR can conduct the inquiry “in such manner as it may deem
fit”, the said words are intended only to convey that a wide discretion is
vested in the BIFR in regard to the procedure it may follow for conducting
an inquiry under Section 16(1) and nothing more. In fact, once the
reference is registered after scrutiny, it is, in our view, mandatory for
the BIFR to conduct an inquiry. If one looks at the format of the reference
as prescribed in the Regulations, it will be clear that it contains more
than fifty columns regarding extensive financial details of the Company’s
assets, liabilities, etc. Indeed, it will be practically impossible for the
BIFR to reject a reference outright without calling for
information/documents or without hearing the Company or other parties.
Further, the Act is intended to revive and rehabilitate sick industries
before they can be wound up under the Companies Act, 1956……. It is also the
legislative intention to see that no proceedings against the assets are
taken before any such decision is given by the BIFR for in case the
Company’s assets are sold, or the Company wound up it may indeed become
difficult later to restore the status quo ante. Therefore, in our view,
[the High Court of Allahabad, the High Court of Andhra Pradesh and the High
Court of Himachal Pradesh] are right in rejecting such a contention and in
holding that the inquiry must be treated as having commenced as soon as the
registration of the reference is completed after scrutiny and that from
that time, action against the Company’s assets must remain stayed as stated
in Section 22 till final decisions are taken by the BIFR.”

21. This Court also referred to the Regulations framed under the SICA
and in connection therewith it was held that after the amendment of
Regulation 19 with effect from 24th March, 1994 once a reference is
registered and it becomes mandatory to simultaneously call for information
or documents from the informant and such a direction is given, then an
enquiry under Section 16(1) of the SICA must, for the purposes of Section
22 thereof, be deemed to have commenced. This is what this Court held in
paragraph 30 of the Report:

“There can, therefore, be no difficulty in holding that after the amendment
to Regulation 19 w.e.f. 24-3-1994, once the reference is registered and
when once it is mandatory simultaneously to call for information/documents
from the informant and such a direction is given, then inquiry under
Section 16(1) must - for the purposes of Section 22 - be deemed to have
commenced. Section 22 and the prohibitions contained in it shall
immediately come into play.”

22. Another facet of this situation is when proceedings are pending both
before the BIFR and the Company Court but no order of winding up has been
passed against the company. In such a situation (though we are not directly
concerned with it) this Court took the view in Tata Motors Ltd v.
Pharmaceutical Products of India Ltd[3] that the provisions of SICA would
prevail over the provisions of the Companies Act. In that case a scheme of
rehabilitation of the company was prepared and presented before the High
Court under Section 391 of the Companies Act while proceedings were pending
before the Appellate Authority for Industrial and Financial Reconstruction
(AAIFR) under the SICA. The High Court approved the scheme of compromise
and arrangement and in view of the order of the High Court the AAIFR also
approved the scheme. This Court relied upon NGEF Ltd. v. Chandra Developers
(P) Ltd.[4] to conclude that the Company Court and the BIFR do not exercise
concurrent jurisdiction. “Till the company remains a sick company having
regard to the provisions of sub-section (4) of Section 20 [of the SICA],
BIFR alone shall have jurisdiction as regards sale of its assets till an
order of winding up is passed by a Company Court.” Since the provisions of
the SICA would prevail over the Companies Act, this Court held that the
High Court could not have exercised jurisdiction and approved the scheme of
compromise and arrangement prepared under Section 391 of the Companies Act.
23. Another situation is where a winding up order is passed by the
Company Court but it is stayed in appeal. In Rishabh Agro the company was
ordered to be wound up but this order was stayed by the Division Bench of
the concerned High Court. Thereafter the company made a reference to the
BIFR under Section 15 of the SICA.
24. Under these circumstances, one of the contentions urged by learned
counsel for the respondents in that case was that an unscrupulous litigant,
after suffering an order of winding up, could approach the BIFR and get the
winding up proceedings stayed. This Court observed that such a grievance
might be justified but if a provision of law is misused and subjected to
abuse of the process of law, it is for the Legislature to take appropriate
steps.
25. With regard to the merits of the controversy before it, this Court
took the view 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.
While referring to this Section it was held that there was no doubt that
the provision would be applicable even after the winding up order is passed
and no proceedings even thereafter could be taken under the Act. It was
noted that a winding up order passed under the Act is not the culmination
of the proceedings before the Company Court but is in effect the
commencement of the process which ultimately would result in the
dissolution of the company in terms of Section 481 of the Act. This is what
this Court had to say in paragraphs 9 and 11 of the Report:

“9. It is true that for invoking the applicability of Section 22 it has to
be established that an inquiry under Section 16 is pending or any scheme
referred to under Section 17 is under preparation or sanctioned scheme is
under implementation or an appeal under Section 25 to an industrial company
is pending. But it cannot be said that despite the existence of any of the
aforesaid exigencies the provision of Section 22 would not be attracted
after the order of winding up of the company is passed. The words
“no proceeding for 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 receiver in respect thereof shall lie or
be proceeded with further”,
leave no doubt in our mind that the effect of the section would be
applicable even after the winding-up order is passed as no proceeding even
thereafter can be proceeded with further under the Companies Act. The High
Court appears to have not taken note of the aforesaid words i.e. to be
proceeded with further. As the impugned judgment is based upon wrong
assumption of the provision of law and completely ignoring the vital words
noticed hereinabove, the same cannot be sustained.
10. xxxxx
11. It may also be noticed that winding-up order passed under the Companies
Act is not the culmination of the proceedings pending before the Company
Judge but is in effect the commencement of the process. The ultimate order
to be passed in such a petition is the dissolution of the Company in terms
of Section 481 of the Companies Act.”

26. In view of the above, this Court was of opinion that the interim
order passed by the High Court after the reference was registered by the
BIFR could not be sustained and deserved to be set aside.
27. From the above it is quite clear that different situations can arise
in the process of winding up a company under the Companies Act but whatever
be the situation, whenever a reference is made to the BIFR under Sections
15 and 16 of the SICA, the provisions of the SICA would come into play and
they would prevail over the provisions of the Companies Act and proceedings
under the Companies Act must give way to proceedings under the SICA.
28. In this state of the law, in so far as the present appeal is
concerned, we do not find any error in the view taken by the High Court in
concluding that the winding up proceedings before the Company Court cannot
continue after a reference has been registered by the BIFR and an enquiry
initiated under Section 16 of the SICA. The present appeal is squarely
covered by the primacy given to the provisions of the SICA over the
Companies Act as delineated in Real Value, Rishabh Agro and Tata Motors.
Consequently, the High Court was right in concluding that the provisions of
Section 22 of the SICA would come into play and that the Company Court
could not proceed further in the matter pending a final decision in the
reference under the SICA.
29. Quite apart from the above, we are also of opinion that in view of
the subsequent developments and the fact that Madura Coats had participated
before the BIFR and has taken its dues in terms of the rehabilitation
scheme approved and sanctioned by the BIFR, nothing really survives for
consideration in this appeal. Strictly speaking, we have merely undertaken
an academic exercise pursuant to a reference made to a larger Bench.
30. As far as the reference is concerned we are of the view that Real
Value and Rishabh Agro do not require any reconsideration. Tata Motors was
decided by a Bench of three Judges and we see no reason to differ from the
view taken therein that the provisions of SICA prevail over the provisions
of the Companies Act.
31. The appeal is without merit and is dismissed.

……..……………………………..J
( Jagdish Singh Khehar)

……………………………………J
( Madan B. Lokur )

…..………………………………J
( C. Nagappan )
New Delhi;
June 29, 2016

-----------------------
[1] (1998) 5 SCC 554
[2] (2000) 5 SCC 515
[3] (2008) 7 SCC 619
[4] (2005) 8 SCC 219

Back to Judgments