M J Antony: Debt recovery made complex

OUT OF COURT

Woes of the creditors are compounded by laws which claim priority over others.

Recovering dues from a sick unit is an exhausting task, especially when there are several laws trying to regulate the rules. Each Act claims to operate excluding others. Ultimately, it is for the courts to apply their ingenuity to sort out the forensic mess created by rival claims for priority in payments.

In Jay Engineering Works Ltd vs Industry Facilitation Council, decided by the Supreme Court last month, the question was which law would prevail "" the Sick Industrial Companies (Special Provisions) Act 1985 or the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act 1993? The dispute arose when Diamond Wire Industries, a small-scale unit which supplied its products to Jay Engineering between 1996 and 2000, demanded payment. By then, Jay Engineering had become sick and was referred to the Board for Industrial and Financial Reconstruction (BIFR).

While the board was trying to revive the sick company by various rehabilitation schemes, the small-scale unit moved the Industry Facilitation Council for its dues. The company resisted the claim, invoking the Sick Companies Act, which bars certain claims. The council, however, decided in favour of the small-scale unit and asked the sick company to pay the dues. Following this the bank account of the company was attached. The company moved the Madhya Pradesh High Court, which dismissed its petition. According to the high court, the 1993 Act would prevail over the 1985 Act. The company, therefore, appealed to the Supreme Court. It argued that the two Acts operated in different fields and neither prevailed over the other. The Supreme Court was for harmonious interpretation of the two laws and ruled that the 1985 Act (Sick Industries Act) would apply in this case.

The conflict of interpretation was caused by the drafting of the two central legislations. Both the laws have clauses which start with the phrase, "notwithstanding anything contained in other laws". Section 10 of the 1993 Act says that the provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force. The Sick Industries Act also has a similar provision in Section 22. It says that when a sick unit is under the care of the BIFR, "notwithstanding anything contained in the Companies Act or any other law", no proceeding can be taken against it without the consent of the BIFR. Section 32 of the Sick Companies Act further asserts that this Act shall have effect notwithstanding anything inconsistent with it in any other laws.

Since both Acts have "notwithstanding" clauses, the ordinary rule followed by the court is that the latter Act in time will prevail over the older one. In this case, though the 1993 Act is the latter one, the 1985 Act had undergone an amendment in 1994. Therefore, it becomes the latter Act, according to the Supreme Court. This principle was laid down in 2000, in its judgement in Allahabad Bank vs Canara Bank. In that case, the conflict was between the Companies Act 1956 and the Recovery of Debts Due to Banks and Financial Institutions Act 1993. The Supreme Court ruled that the latter law would take precedence.

Another rule followed by the courts is that the special law will prevail over the general law. However, there are too many special laws passed by Parliament these days to meet the peculiar situations thrown up by the developing economy. In the Allahabad Bank case, the conflict was between two special laws and the court applied the chronological test.

However, it is not the seniority of the law alone which matters. The ultimate conclusion would depend upon the context of the laws. In Shri Sarwan Singh vs Shri Kasturi Lal (1977), the Supreme Court noted the problem raised by the "notwithstanding" clauses and observed: "Since statutory interpretation has no conventional protocol, cases of such conflict have to be decided in reference to the object and purpose of the laws under consideration."

Two recent judgements of the Supreme Court gave prominence to the Sick Industries Act in the context of claims for the dues of the workers and winding up petitions before the company court. Last year, in NGEF Ltd vs Chandra Developers, it said that till the company remains sick, BIFR alone shall have jurisdiction as regards sale of its assets till an order of winding up is passed by a company court. In ICICI Bank vs Sidco Leathers, the court considered the claim of workers' wages vis-à-vis the claims of secured creditors and observed that the interpretative process must be kept confined to the legislative policy and it could not be stretched beyond that. Thus, the Sick Industries Act is still alive and kicking though there was an outcry against its misuse a few years ago and the Delhi High Court as well as several other authorities had recommended its repeal.