M J Antony: Sale of sick companies' assets

OUT OF COURT

The problems have been compounded by the apathy of the government which has not notified the new law.

When there are more than one legislations operating in the same field, the burden of harmonising the various provisions in them is left to the courts. This task is specially hard when the provisions concerned start with the word, "notwithstanding", each acquiring an overriding effect. The recent Supreme Court judgement in Morgan Securities & Credit Pvt Ltd vs Modi Rubber Ltd did a tight-rope walk in this respect. It had to reconcile the provisions of the Arbitration and Conciliation Act and the almost defunct Sick Industrial Companies (Special Provisions) Act. The issue was which of them would prevail in a case like this when the various authorities passed contrary orders under these laws.

When Modi Rubber defaulted in repaying a loan of Rs 5 crore, the lender company invoked arbitration. The arbitrator made an award in favour of Morgan Securities.

He also restrained the defaulting company from alienating its assets. Morgan Securities had also filed an application before the Allahabad High Court for winding up the defaulting company. The high court then barred any dealing in the assets of the company.

Further, the appellate board under the Sick Industries Act (SICA) also had passed a similar order.

Modi Rubber moved the board for selling certain shares of a company, which was also denied.

However, when it moved the Delhi High Court, it allowed the sale of assets, despite the earlier orders by various authorities. This issue was taken to the Supreme Court. By now, the shares had already been sold. Therefore, the Supreme Court could only lay down the law and make some caustic remarks about the Delhi High Court and "unscrupulous debtors" who approach the board for stalling the proceedings and keeping the creditors at bay.

When a company is referred to the Board for Financial and Industrial Reconstruction (BIFR), certain consequences follow under SICA. The proceedings for the winding up of the company or for execution of distress or the like against the property of the company or for the appointment of a receiver, would not continue. No suit for the recovery of money or for the enforcement of any security or guarantee shall be proceeded with further. The rule can be waived only with the consent of the board or the appellate authority. According to the Supreme Court, the power to allow disposal of property of a sick company must be found in the law. It was doubtful whether such power could be exercised for the sale of the assets of the sick company.

Some propositions of law follow as a consequence. An order can be passed by the board for suspending the operation of the arbitration award if any occasion justifying it arises. While exercising its power under SICA, the board cannot ignore any order passed by a superior court. It is bound by the doctrine of judicial discipline. While the board has a duty to afford maximum protection to employment, optimise the use of financial resources, realise the amounts due to the banks and salvage the assets of production, it has to act within the four corners of the statute. The board must be governed by the principles of "judicial amity and comity" and should not pass interim injunctions for the asking.

Though the judgement has dealt with core issues over the inter se primacy of the different authorities, it has failed to draw clear principles for future guidance in similar cases. It would be helpful if the courts adopted the practice of giving conclusions and summaries at the end of the judgements more regularly. Complex discussion on such contentious questions would only help the lawyers to fudge the issues further when they get an opportunity. The high courts also would misunderstand the law and pass different orders as in this case.

Perhaps much of the confusion prevailing in this field could be avoided if the government had notified the new law on this subject. The Parliament has replaced SIC by the Sick Industrial Companies (Special Provisions) Act 2003. The vacuum thus created has been filled by an amendment to the Companies Act. But so far the provisions of the amending legislation and the Companies Act have not been brought into force. One part of the present judgement laments this lethargy on the part of the Central government. It is a curious habit of the government to pass laws and then dilly-dally on their enforcement. The supreme example in this context is the Hire Pushes Act of 1972, which has not come into effect even now, leading to the regime of repossessors of motor vehicles.