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right of unsecured creditor before bifr.

Dear friends,

A Sick Industrial Company had prepared a Draft Rehabilitation Scheme (DRS) and presented it before BIFR for its approval. An unsecured creditor filed and application before BIFR requiring that Company had not incorporated its dues in the said DRS and accordingly the said DRS has to be declared as incomplete and a fresh DRS should be filed by the Company with incorporating of theirs dues.

Friends, let me know that whether unsecured creditors have right for any such types of application or can BIFR pass a declaratory order that contention of unsecured creditors is right and directed to company to file new DRS with incorporating dues of unsecured creditors.

Please share yours view with supporting of landmark case laws.



Corporate Lawyer


Continental Carbon India Private Limited v. Modi Rubber Limited

In this case, the scheme of rehabilitation of Modi Rubber Limited (“Modi Rubber”) was approved by the Board for Industrial and Financial Reconstruction (“BIFR”) under the Sick Industrial Companies (Special Provisions) Act, 1985 (“SICA”). Under the scheme, the unsecured creditors were provided with certain alternatives to satisfy their claims due from the Modi Rubber. The petitioner, who was an unsecured creditor, was not satisfied with the scheme so drawn on the ground that the debts recorded in the scheme due to the petitioner were much less than the actual debts due to it. The petitioner then filed an appeal before the Appellate Authority for Industrial and Financial Reconstruction (“AAIFR”) against the scheme proposed to the extent it provided a dispensation for payment of unsecured creditors. The appeal was dismissed by AAFIR on the ground that there is no specific clause in SICA which makes it incumbent for BIFR to obtain the consent of unsecured creditors while sanctioning a revival scheme.

The petitioner being aggrieved by the decision of AAFIR then filed a writ petition with the Delhi High Court challenging the order of AAFIR. The main issue before the Delhi High Court in this case was whether an unsecured creditor can be forced to give concession to the sick unit under the provisions of SICA, even if such unsecured creditor is willing to wait to enforce its claim till such time as the company is financially rehabilitated. The petitionerinter alia contended that the denial of full price and compelling the petitioner to accept a lesser amount would violate the appellant’s right to property in the goods as enshrined in the Constitution of India. Further, petitioner also contended that its consent was required to be taken before drafting the scheme under the provisions of SICA.

The Delhi High Court set aside the order passed by AAFIR and inter alia held that a scheme made under the provisions of the SICA cannot provide for discharge of any encumbrance created by the sick company (except by payment in full) or reduction or scaling down of its liabilities to the creditors (which includes unsecured creditors) except with their consent being obtained under the usual legal procedure. The Delhi High Court also held that an unsecured creditor has the option not to accept the scaled down value of its dues and wait till the scheme of rehabilitation of the company has worked itself out with an option to recover its debt post such rehabilitation.


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