Supreme Court clarifies: recovery application by banks stayed against Sick Company
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.
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.
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.
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:
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.
1  123 CLA 198 (SC)
2 See Section 18 of 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