Suit For Recovery Against 'Sick Company' Not Barred If It Doesn't Affect Company's Properties Or Revival Scheme : Supreme Court

If the recovery proceedings against the Sick Company do not pose a threat to its properties or have adversely impacted the scheme of the revival of the Sick Company, then there wouldn't be a bar for filing a suit for the recovery of the dues against the Sick Company, observed the Supreme Court.

Concurring with the findings of the High Court, the bench comprising Justices JB Pardiwala and Sandeep Mehta observed that the suit for recovery of money against the Sick Company towards the dues arising under the alleged illegal deductions under the contract would not be barred under Section 22(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 (“the 1985 Act”) as initiation of such proceedings wouldn't adversely impact the scheme of revival of the company.

“The suit was a simple suit for recovery of money towards the dues arising under the alleged illegal deductions under the contract. This cannot be said to be a proceeding in the nature of execution, distress or the like and hence the suit was not hit by Section 22(1) of the 1985 Act.”, the court observed.

Section 22(1) of the 1985 Act provides that subject to the fulfilment of the conditions as described in the sub-section, proceedings of the nature mentioned therein shall remain suspended in respect of a sick industrial company.

The Judgment authored by Justice JB Pardiwala held that if the conditions mentioned under Section 22(1) of the 1985 Act are fulfilled, then there would be a bar on the initiation of proceedings against the Sick Company which tends to impose a threat to the sick company's properties or adversely impacts the revival scheme of the sick company.

The legislative mandate behind Section 22 of the 1985 Act is to protect the sick company after it is declared as a 'sick company' under the 1985 Act.

However, the court clarified that such protection granted to the Sick Company would not extend to a scenario where the money recovery proceedings initiated against the sick company are with respect to the debt owed by the sick company to the creditor.

In the present case, after the appellant was declared as a Sick Company, a money recovery suit was filed against it by the respondent for the recovery of the debt amount of Rs. 18 Lakhs approx.

It was contended by the appellant that the suit for money recovery would not be maintainable as it would be hit by Section 22(1) of the 1985 Act. The appellant contended that any proceedings which adversely affect the revival process of the sick company after it was declared as a sick company under the 1985 Act wouldn't be maintainable. Arguing that the suit for money recovery impacts the revival process of the sick company, therefore the proceedings wouldn't be maintainable against it.

Another leg of submissions made by the appellant was that the respondent could have initiated the recovery proceedings, despite there being a bar under Section 22(1) of the 1985 Act, only if the amount of debt is acknowledged by the appellant.

Per contra, it was submitted by the respondent/creditor that there is no bar to file a suit for recovery against the appellant/sick company as the recovery proceedings don't intend to impact the revival process of the appellant. The respondent argued that there's no bar under Section 22(1) of the 1985 Act to file a suit for recovery of debt amount being unacknowledgeable.

Finding force in the respondent/creditor's contention, the court held that there is no specific bar being operated in terms of Section 22(1) of the 1985 Act to hold that the suit for recovery of the debt amount doesn't impact the revival process of the sick company, is not maintainable.

The court's observation is based on the non-fulfillment of the third requirement for availing exemption under Section 22(1) of the 1985 Act. The third requirement says that the proceedings would be barred against the sick company if the proceedings must have the effect of threatening the assets of the sick company and interfering with the formulation, consideration, finalization, or implementation of the scheme.

The court noted that despite the fulfilment of the other two conditions, the third condition is not fulfilled in the present case.

“We say so because the suit for recovery was not of a nature that could have proved to be a threat to the properties of the defendant's sick company or would have adversely impacted the scheme of revival. The suit was a simple suit for the recovery of money towards the dues arising under the alleged illegal deductions under the contract. This cannot be said to be a proceeding in the nature of execution, distress or the like and hence the suit was not hit by Section 22(1) of the 1985 Act.”, the court observed.

Also, the court rejected the appellant's contention that the non-acknowledgment of the debt by the appellant wouldn't give a right to the respondent to initiate the recovery proceedings against the appellant.

“By no stretch of imagination could it be said that the legislature intended to include even the proceedings for the adjudication of the liabilities not admitted by a sick company within the protective ambit of Section 22(1) of the 1985 Act. Such an adjudicatory process only determines the liability of the defendant towards the plaintiff and does not threaten the assets of the sick company or interfere with the formulation of the scheme unless execution proceedings are initiated pursuant to the completion of such adjudicatory process.”, the court observed.

Conclusion

Based on the above premise, the court held in favor of the respondent by stating that there wouldn't be an embargo on the recovery proceedings against the appellant under Section 22(1) of the 1985 Act.

Counsels For Petitioner(s) Ms. Malvika Trivedi, Sr. Adv. Mr. Chirag Joshi, Adv. Mr. Shailendra Slaria, Adv. Mr. Ghanshyam Joshi, AOR

Counsels For Respondent(s) Mr. Sundeep Pothina, Adv. Mr. Vaibhav Dwivedi, Adv. Ms. Ankita Chaudhary, AOR

Case Title: FERTILIZER CORPORATION OF INDIA LTD. vs. M/S. COROMANDAL SACKS PRIVATE LIMITED, CIVIL APPEAL NOS. 5366-5367 OF 2024

Citation : 2024 LiveLaw (SC) 338

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