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Revival of a sick company to take precedence over recovery proceedings, SC rules

The Supreme Court has said that the revival of a sick company will take precedence over recovery proceedings. The provisions of the Sick Industrial Companies Act (SICA), 1985, will prevail over the Recover/y of Debts Due to Banks and Financial Institutions (RDBB) Act, 1993, said a three-judge bench, headed by chief justice of India HL Dattu.

"We hold that the provisions of SICA, in particular Section 22, shall prevail over the provision for the recovery of debts in the RDDB Act," said the bench, which also comprised justices SA Bobde and Abhay Manohar Sapre.

KSL & Industries Ltd had challenged a February 2006 ruling by the Delhi High Court which held that in view of the specific bar contained in SICA, no recovery proceedings could be effected against M/s Arihant Threads Ltd.

It had set aside the order passed by the Debt Recovery Appellate Tribunal (DRAT), Delhi, on this ground. The issue then went to a two-judge bench, comprising justices CK Thakker and Altamas Kabir, which then referred it to a threejudge bench. The three-judge bench ruled that recovery proceedings cannot be initiated while the revival process was on. Protection of SICA would not, however, be available to a company if recovery proceedings had concluded under the RDDB Act, it said.

Arihant had set up an export-oriented spinning unit for manufacturing cotton yarn in Amritsar, Punjab. The company leased a plot in 1992 for 99 years on the condition that it would not transfer interest in it for the first 15 years without the lessor's nod. It could, however, mortgage lease-hold rights to a bank for a loan. It got its project financed by the IDBI. After the company failed to repay loan installments, IDBI filed for recovery before the DRT ( Debt Recovery Tribunal) under the RDDB Act.

The company stayed away from the DRT proceedings despite being asked to explain its position.

On July 15, 2003, the DRT passed a final order in IDBI's favour for the recovery Rs 25.3 crore along with interest at 7.8 per cent per year. If the company failed to pay, IDBI was directed to sell the mortgaged property of the company and recover the amount. The IDBI recovery officer asked Arihant to pay or face sale of movable or immovable property. He fixed the reserve price of the properties at Rs 12.50 crore. In October 2004, Arihant filed an appeal against the DRT order.

KSL was the highest bidder at the auction sale at Rs 12.50 crore. Arihant then challenged the DRT order which set aside the auction subject to payment of a certain amount, interest and expenses. Objecting to these conditions, Arihant filed an appeal before DRAT, Delhi. KSL also filed an appeal, aggrieved by the setting aside of the sale.

In the interim, Arihant invoked the provisions of SICA and filed a reference before the Board of Industrial Finance & Reconstruction (BIFR).

Later, DRAT dismissed Arihant's appeal and confirmed the auction to KSL on depositing the sale price.

DRAT directed that IDBI's recovery officer hand over possession of the property to the auction-purchaser after it deposited the entire amount. Before the process was complete, Arihant filed two writ petitions before the Delhi High Court against the DRAT order.


The High Court then ruled that no recovery could be made as revival proceedings were underway. Subsequent to the high court order, BIFR rejected Arihant's reference. Arihant went to the appellate tribunal and then to the Supreme Court.

The two judges differed on which law would prevail over the others. Ultimately, the legal issue was settled by the three-judge bench which said that recovery proceedings under the RDDB Act cannot be initiated while the recovery process was on under SICA.

Article referred: http://articles.economictimes.indiatimes.com/2014-11-04/news/55757776_1_recovery-proceedings-drt-idbi

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