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Bhaven (Professional)     27 September 2011

Sica wrt sarfaesi

Dear Member,

I require help with the undermentioned situation:

My client is a decree holder (but unsecured creditor) from the Bombay High Court against a company which approached the BIFR in 1987 and has since been declared as a sick company. However a major bank which has been its secured creditor only since 2008 has undertaken necessary proceedings u/s 13(4) of the SARFAESI Act. As many as 5 schemes have failed and the company has no intention of making any successful. The Rajhasthan High Court gave an ex-party stay on the execution of the Bombay High Court decree. The Supreme Court quashed the admission of the appeal saying they will not interfere with the proceedings looked after by the BIFR. 23 years have passed by but there is no remedy to this issue. As an unsecured creditor what actions must be undetaken in order to recover the money from a company which seems to be using the cover of BIFR and SICA to cheat its creditors? Whether any remedy lies in the Bombay High Court? Whether the protection under SICA abates due to proceedings undertaken by the bank u/s 13(4) of the SARFAESI Act? What must be done to enforce this abatement? Whether that will benefit my client? Please help.


 4 Replies

Anjuru Chandra Sekhar (Advocate )     27 September 2011

You can file winding up petition under sections 433 and 434 of Companies Act.

Bhaven (Professional)     28 September 2011

Very evidently the company taking protection under BIFR has the means and capacity to pay off its creditors. The operationg agency has already recovered substantial dues. Also, the supreme court quashed the prayer regarding winding up of the company. The company is still under the purview of the BIFR. So now whether an application needs to be made for the protection under SICA to abate or it is automatically effected.

Thankyou Mr. Chandrasekhar for your contribution.

Anjuru Chandra Sekhar (Advocate )     30 September 2011

Yours is a peculiar case because unsecured creditors are at the most disadvantageous position with regard to enjoyment of Company's assets.  Let me first answer the question : Whether any remedy lies in the Bombay High Court? Whether the protection under SICA abates due to proceedings undertaken by the bank u/s 13(4) of the SARFAESI Act? What must be done to enforce this abatement?


Yes. The Schedule to SARFAESI Act made amendments to Sub-section (1) of Section 15 of SICA, 1985 wherein Secured creditors representing not less than three-fourth in value of the amount outstanding against financial assistance disbursed to the borrower of such secured creditors, have taken any measures to recover their secured debt under sub-section (4) of section 13 of that Act", a reference is pending before the Board for Industrial and Financial Reconstruction shall abate.   Whether that will benefit my client?   


No.  That will not benefit your client because Secured Creditor is only obliged to keep aside amounts relating to workmen under Section 529A of Companies Act from the sale proceeds of secured assets.  SARFAESI Act, does not provide for relief to unsecured creditors.


But there could be one relief.  BIFR is still existing because government has not notified the repealment of SICA, 1985. SICA has been repealed by NDA government and in place of BIFR, NCLT was to come into place.  But due to negligence of Central government, NCLT has not yet come into existence and as government has not yet notified the repealment of SICA, BIFR is still continuing as official body. 


Here there is a question of law which you will find very interesting.  How long the government can take to notify the repealment of a certain legislation?  SICA was repealed in 2003 itself.  It is now 2011.  If the government does not notify certain Act (SICA repeal Act, 2003) made by parliament, then will the Act remain without having any legal validity?  These questions can be asked in the form of Public Interest Litigation to Supreme Court. In that litigation we can also question whether BIFR carry the force of law in view of the fact that SICA is repealed.  If it does not have force of law, then the government have right to take reference made to that body?  And the courts have right to stall the winding up proceedings of a certain company under the pretext that a reference is made to BIFR?  It is high time Apex court answers these questions.


Next whether BIFR is allowed or not is a different issue, but the SARFAESI has the force of law.  So when the Secured creditors take action under Section 13(4) the reference to BIFR shall abate.  And that means line is cleared for winding up proceedings too under Companies Act for unsecured creditors.  It is very logical, justifiable too because one side the in the Assets purchased by Company, the funds of unsecured creditors may exist.  And such assets are given as mortgage to Secured creditors.  And when Secured Creditors invoke the SARFAESI Act, if the reference under BIFR still does not abate, it means that the Secured creditors have enjoyed the assets in which the funds of unsecured creditors are involved.  The other side, the existence of reference still protects the Company from unsecured creditors which is unwarranted.  Technically, when the Secured creditors are able to enforce their rights the Company's assets are sold and there is no chance of revival of the company even if BIFR proposes some new package.  So there is no point in BIFR still holding the responsibility of the Company.  Hence, the reference shall abate giving scope to unsecured creditors to initiate Winding up proceedings under Companies Act, because there is no possibility of survival after Company's assets are sold off by Secured creditors and made company's position worse. 


A new petition to Supreme Court on these lines may help.


1 Like

Bhaven (Professional)     05 October 2011

Thankyou for the detailed insight Mr. Chadrasekhar. A very clinical point brought out by you regarding the funds of the unsec creditors present in the assets so secured by the bank. In the meanwhile if there would be any judgements favouring my contention. Thanks again

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