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| M J Antony: Firms on the rock | | The Sick Industries Act is conferred primacy over other laws despite its own pathology |
| M J Antony / New Delhi Feb 22, 2012, 00:12 IST |
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Whether the Sick Industrial Companies Act (SICA) has done more good than harm is an existential question that is difficult to answer. One view is that malingerers invoke it more often than those who need restorative or palliative care. For this reason, there was an attempt to repeal the Act in 2003, but it had a miraculous escape since the law to rescind it was allowed to lapse. Thus, the twice-born Act has continued to provide even more litigation that seems to be one of the main reasons for its existence.
The Act has been criticised for being too protective of sick units and providing automatic stay of all legal proceedings against them. There is need for consensus among secured creditors before finalising a revival scheme. The operation of the scheme is not monitored and there are delays at every stage.
On the other hand, there is need for some kind of recuperative mechanism when industrial sickness is as frequent as a common cold. Institutional care like that provided by the Board for Industrial and Financial Restructuring (BIFR) is essential, it is argued.
In the last 25 years of its existence, one of the frequent questions that came up before the courts is the primacy of SICA over other legislation. The issue reappeared again in the Supreme Court last fortnight in the case, Raheja Universal Ltd vs NRC Ltd. This time it was SICA against the Transfer of Property Act. Again SICA won.
The crucial provisions that hurt the creditors and lead to litigation are Sections 22 and 22A. The lengthy Section 22 says “notwithstanding” anything contained in the Companies Act or any other law or memorandum and articles of association, no legal proceedings can be taken against the sick firm without the consent of BIFR. Section 22A further says the sick unit shall not dispose of its assets except with the consent of BIFR.
In this case, the appellate authority above BIFR, called AAIFR in short, permitted the sale of land according to an agreement among the parties. The Bombay High Court held that the order was not sustainable as land was part of the scheme and the sale was subject to the final orders of BIFR. On appeal, the main issue was whether these SICA provisions will have an overriding effect over Sections 53A and 54 of the Transfer of Property Act. The court ruled that SICA will prevail.
The Supreme Court stated that law-makers have “undoubtedly given an overriding effect to the provisions of SICA and even restricted the jurisdiction of the civil courts.” The judgment stated that the law is a complete code in itself and it is a special law. General laws like the Transfer of Property Act shall yield before SICA. The Transfer of Property Act, enacted in 1882, does not apply to a particular situation or a class of people.
In some earlier cases, too, the Supreme Court had granted precedence to SICA. In Morgan Securities & Credit Ltd vs Modi Rubber Ltd, one issue was whether BIFR could suspend the enforcement of an arbitration award. The Arbitration and Conciliation Act also has Section 5 that gives primacy to that law over all other legislation. Therefore, there was a tie between the two laws. Even then, the Supreme Court ruled that SICA shall prevail over the arbitration law. Thus, BIFR has the power to suspend an arbitration award.
Another leading judgment in this respect is Jay Engineering Works Ltd vs Industry Facilitation Council. The Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act also had a provision that granted it overriding powers. However, the Supreme Court conferred primacy to SICA. Only two legislations, the Foreign Exchange Regulation Act and the Urban Land (Ceiling and Regulation) Act seem to have specifically excluded the interference of SICA.
The problem with this primacy is that parties involved can manipulate the provisions in several ways to their advantage. Companies can dress up balance sheets to show losses and then invoke SICA provisions to seek moratorium and delay or stall payment of liabilities. Creditors will have to run like headless chickens while crafty firms and directors hide in the haven provided by SICA. They get an automatic stay against debt recovery, akin to honchos feigning angina and getting admitted to hospital when there is a tax raid.
Creditors are stumped by procedural delays at every stage. Experts in BIFR have to examine whether there is sickness and if so, what is to be done to revive the firm. It is not uncommon to find saboteurs within who do not want a winning scheme or wish to grab assets for a song. Then, there is a hunt for financial institutions that are willing to risk joining the revival plan. All these take time to be sorted out. In the latest case of Raheja Universal, the revival exercise started in 2005, and the court has just settled the legal issues. It has sent the parties before BIFR, with a “poised hope” that it would dispose of the matter “expeditiously”.
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