BIFR proceedings under sick industries act prevail over winding up proceedings under companies act - SC

Madura Coats filed company petition in Allahabad High Court for winding up of Modi Rubber Company on the ground that the said company was unable to pay its huge undisputed debts. Modi Rubber Company entered appearance and took several adjournments on one pretext or the other including furnishing schedule for repayment of the admitted debts in arrangement with Apollo Tyres Limited.

Eventually after two years of adjournment, the Company Court declined to grant any further adjournments to Modi Rubber and considering the material on record, passed an Order dated 12.03.2004 holding that Modi Rubber was unable to pay its undisputed debts and that it was just and equitable to wind up the Company.

An official liquidator was appointed to take charge of the assets of the Company. M/s. Modi Rubber preferred an appeal before the Division Bench contending that BIFR proceedings had started on 17.03.2004 in Case No.153/2004. Therefore under Section 22 of the Sick Industries Act, the winding proceedings have to be kept in abeyance.

The Divison Bench accepted the plea and kept the winding up proceedings in abeyance.

The Order of the Division Bench was challenged before the Apex Court by Madura Coats. The Apex Court was of the opinion that the matter requires re-consideration with reference to its earlier judgment and therefore desired to refer the matter to a larger Bench after obtaining the orders from the Chief Justice of India.

 In the mean time, during pendency of the special leave petition, Madura Coats challenged the BIFR proceedings before Allahabad High Court. The writ petition was dismissed as premature.

Subsequently, Madura Coats moved application before BIFR and participated in the BIFR proceedings. In the mean time, BIFR sanctioned rehabilitation scheme under Sections 19(3) and 19(4) of Sick Industries Act for implementation of all concerned with certain conditions. Madura Coats did not challenge this rehabilitation scheme of BIFR. Subsequent to the rehabilitation scheme, in the company case Modi Rubber submitted that it was willing to pay the debts of Madura Coats in terms of the rehabilitation scheme. Accordingly, the Company Court directed to pay certain amount, which was paid by Modi Rubber to Madura Coats.

The Apex Court took into consideration the above subsequent developments and also was of the view that the proceedings of BIFR under Sick Industries Act would prevail over the proceedings under the Companies Act 1956 and accordingly, the appeal of Madura Coats was dismissed by the Apex Court.

This judgment is reported in 2016 (7) SCC 603 in the case of Madura Coats Vs Modi Rubber. The judgment is rendered by Hon'ble Justice Mr. Jagdish Singh Khehar, Hon'ble Justice Mr. Madan B Lokur and Hon'ble Justice Mr. Chockalingam Nagappan.

It is relevant to note that Justice Jagdish Singh Khehar was the Chief Justice of Karnataka before being elevated to the Apex Court and would be our Chief Justice of India from January 2017. It was Justice Jagdish Singh Khehar who sent Sahara Chief Mr. Subroto Roy to jail for not depositing the amounts of shareholders as directed by SEBI.

Dr Gubbi and team are Counselors and Advocates practicing in many verticals of law especially laws related to international trade and commercial disputes.

The author can also be reached at drgubbilegal@gmail.com