Update

Revival of Sick Units takes precedence over Loan Recovery

Prachi Narayan
prachi@vinodkothari.com

Vinod Kothari & Company

November 7, 2014

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Revival of Sick Units takes Precedence over Loan Recovery Process

The Supreme Court in its judgment in case of KSL Industries Ltd vs. Arihant Threads
Ltd1 on October 27, 2014 finally settled the position of law over the vexed issue of
precedence of two special enactments, Sick Industrial Companies (Special Provisions)
Act, 1985 (SICA) and Recovery of Debt Due to Banks & Financial Institutions Act,
1993 (RDDBFI).
Since both the enactments are special laws, there have been diverse and different views
of the courts with regard to precedence of one over the other. The lurking issue finally
resolves with the unanimous judgement of the three judge bench of the Apex court which
upheld that the provisions of SICA shall prevail over the provisions of RDDBFI.

The Case
The facts of the case in nutshell are that Arihant Threads Ltd (Respondent) had availed a
loan from IDBI bank for its exportoriented spinning unit set up in Amritsar, Punjab. The
Respondent defaulted in payment of loan installments and IDBI moved Debt Recovery
Tribunal (DRT), Chandigarh and obtained an ex-parte order in its favour in July 2003 to
dispose of Respondents assets. Respondent stayed away from the DRT proceedings
inspite been given a chance to explain it.
In September 2004, the movable and immovable properties of the Respondent were
valued accordingly and put for auction wherein KSL Industries Ltd (Appellant) was
declared the highest bidder.
The Respondent moved an application in DRT, Delhi for settling the ex-parte order of
DRT, Chandigarh in December 2004. DRT Delhi set aside the auction sale holding that
the properties of the Respondent were not valued properly.
Subsequently, both the Respondent and the Appellant moved to Debt Recovery Appellate
Tribunal (DRAT), Delhi. DRAT Delhi stayed the ex-parte order of DRT Chandigarh.
Meanwhile, the Respondent invoked the provisions of SICA by making the reference to
Board of Industrial Finance & Reconstruction (BIFR). The DRAT Delhi confirmed the
sale in favor of Appellant.
However, before the sale formalities could be completed, Respondent filed two Writ
Petitions in the Delhi High Court on the ground that debt recovery procedure cannot be
carried out because of the prohibition in Section 22 of the SICA. Delhi High Court
allowed the writ petitions setting aside the order of DRAT, Delhi. Appellant preferred an
appeal in the Supreme Court where, the two-judge bench had a difference of opinions.
Therefore, the matter was referred to the three-judge that ruled that the debt recovery
procedure is barred under section 22 of the SICA which shall prevail over Section 34 of
the RDDBFI.
1

http://judis.nic.in/supremecourt/imgs1.aspx?filename=42040

Revival of Sick Units takes Precedence over Loan Recovery Process

Our View
This judgment surely rests the conundrum with regard to the precedence of one special
enactment over other special act and is also quintessential to the jurisprudence of
interpretation. The larger bench ruled that while addressing the precedence issue of SICA
and RDDBFI, in view of the non obstante clause contained in both, one of the important
tests is to carefully examine the purpose of the two enactments, so as to recognize and
ensure that the purpose of both enactments is as far as possible, fulfilled.
The General Rules of Interpretation
It is a settled principle of interpretation that a subsequent enactment has precedence over
the previous enactment Further; the doctrine of generalia specialibus non derogant
(general provisions will not abrogate special provisions) is also well settled.
In the instant case both the principles became equally applicable and thus the confusion
sprouted up as to which principle of interpretation would apply.
However, in cases where such confusions spring up, the widely accepted rule of
construction is if one construction leads to a conflict, whereas on another construction
two acts can be harmoniously construed, then the latter must be adopted. In the instant
case
The meaning of Special
Special in layman terms would mean something otherwise than usual or something
designed for a particular purpose or occasion. This would not be daunting task to
ascertain when the base for comparison is generic or general. It becomes complicated
and herculean when the task is to distinguish the special or especial between two
specials.
The Apex Court has carefully and at breadth examined the issue of especial and
addressed the same accordingly, laying down the determining factor to be the purpose of
the enactment and the subject matter it deals with.
In case of LIC vs. DJ Bahadur2 the Apex Court held that In determining whether a
statute is a special or a general one, the focus must be on the principal subject-matter
plus the particular perspective. For certain purposes, an Act may be general and for
certain other purposes it may be special and we cannot blur distinctions when dealing
with finer points of law.
The purpose of SICA is to provide ameliorative measures for reconstruction of sick
2

(1981) 1 SCC315

Revival of Sick Units takes Precedence over Loan Recovery Process

companies, and the purpose of RDDBFI is to provide for speedy recovery of debts of
banks and financial institutions. Indeed both are special laws. With the purpose of
reconstruction and matters incidental thereto, SICA must be considered as special law,
though it may be a general law in relation to recovery of debts. Whereas RDDBFI is a
special law, in relation to recovery of debts and SICA may be considered as general law.
In pretext of the above, the sense is to see and carefully examine the purpose, intention
and objectives the act aims so as to construe what is actually special and what becomes
general.
Further, in order to ascertain the real purpose of both the enactments and also to address
the ambiguity over why in this case the subsequent act would not prevail over the
previous act a deeper look into the Statement of Objects and Reasons of both enactments
becomes imperative.
Statement of objects and reasons of SICA
The introduction to SICA states: An Act to make, in the public interest, special
provisions with a view to securing the timely detection of sick and potentially sick
companies owning industrial undertakings, the speedy determination by a Board of
experts of the preventive, ameliorative, remedial and other measures which need to be
taken with respect to such companies and the expeditious enforcement of the measures so
determined and for matters connected therewith or incidental thereto.
It is fairly clear from the above that SICA was enacted in 1985to provide for timely
determination of a body of experts for providing preventive and remedial measures that
would need to be adopted to sick companies so as to address the ill effects of sickness in
industrial companies such as loss of production, loss of employment, loss of revenue to
the governments and locking up of investible funds of banks and financial institutions. In
order to fully utilize the productive industrial assets, afford maximum protection of
employment and optimize the use of funds of the banks and financial institutions, it was
found imperative to revive and rehabilitate the potentially liable sick industrial
companies. Further the Act not only aims to revive and rehabilitate all sick companies but
those in the schedule to the Industries (Development and Regulation) Act, 1951 (IDRA),
that are presumably vital to the economy of the nation.
In order to achieve the purpose for revival and rehabilitation, protection of sick
companies from its creditors and the multitude of remedies which they may avail of
against the sick company and its properties, was vital and imperative, for the board of
BIFR to draw up a scheme best suited for the sick company. In this backdrop section 22
of SICA was enacted dealing with suspension of legal proceedings, contracts etc while
continuation of BIFR proceedings.

Revival of Sick Units takes Precedence over Loan Recovery Process

Section 22 (1) provides that Where in respect of an industrial company, an inquiry

under section 16 is pending or any scheme referred to under section 17 is under
preparation or consideration or a sanctioned scheme is under implementation or where
an appeal under section 25 relating to an industrial company is pending, then,
notwithstanding, anything contained in the Companies Act, 1956 (1 of 1956) or any other
law or the memorandum and articles of association of the industrial company or any
other instrument having effect under the said Act or other law, no proceedings for the
winding up of the industrial company or for execution, distress or the like against any of
the properties of the industrial company or for the appointment of a receiver in respect
thereof and no suit for the recovery of money or for the enforcement of any security
against the industrial company or of any guarantee in respect of any loans or advance
granted to the industrial company shall lie or be proceeded with further, except with the
consent of the Board or, as the case may be, the Appellate Authority.
The Appellants had put forth that section 22 provides for stay on proceedings of winding
up or execution and distress and not provide for any stay on the recovery of debt process.
The bench carefully examined the provision and ruled that the time when SICA when
enacted in 1985, recovery under RDDBFI was neither in existence nor was such a mode
contemplated. The section further was amended in 1994 include stay on suits for recovery
of money or enforcement of security against the sick company. These words appear to
have been inserted to expressly provide, rather clarify that no suits for the recovery
ofmoney etc. would lie or be proceeded with against such a company. Further, the bench
concluded that the even though proceedings under RDDBFI are not covered expressly
but any proceeding resulting in the execution and distress against the property of such
company would be construed as proceedings within the meaning of section 22.
Statement of objects and reasons of RDDBFI
The introduction to RDDBFI as provided in the text of the Act set forths: An Act to
provide for the establishment of Tribunals for expeditious adjudication and recovery of
debts due to banks and financial institutions and for matters connected therewith or
incidental thereto
RDDBFI was enacted in 1993 by the Parliament to effectively address the issue of
recovery of debts due to banks and locking of investible public funds that prevented
proper utilization and recycling of funds for development of country.The urgent need to
work out a suitable mechanism, through which the debts of banks andfinancial
institutions could be realized without delay, was in form of Special Tribunals, which
would follow summary procedure for adjudication. These Tribunals eventually came to
be known as Debt Recovery Tribunals, which precisely was the intent behind enactment
of RDDBFI.
However, in view of multiple remedies under various other laws for recovery of money
and order to protect the sanctity of proceedings and uphold the objectives for speedy

Revival of Sick Units takes Precedence over Loan Recovery Process

recovery of debts, exclusive protections in form of section 18 and 34 were cautiously

inserted by the Parliament.
Section 34 of RDDBFI provides (1) Save as provided under sub-section (2), the
provisions of this Act shall have effect notwithstanding anything inconsistent therewith
contained in any other law for the time being in force or in any instrument having effect
by virtue of any law other than this Act.
(2) The provisions of this Act or the rules made thereunder shall be in addition to, and
not in derogation of, the Industrial Finance Corporation Act, 1948 (15 of 1948), the State
Financial Corporations Act, 1951 (63 of 1951), the Unit Trust of India Act, 1963 (52 of
1963), the Industrial Reconstruction Bank of India Act, 1984 (62 of 1984), the Sick
Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and the Small Industries
Development Bank of India Act, 1989 (39 of 1989).
Sub-section 1 as stated above is a saving as well as a non-obstante clause conferring an
overriding effect of the provisions of the RDDB over other laws for the time being in
force, while sub-section 2 is in addition to and not in derogation of the special statues as
provided for. Further, it is pertinent to note here that reference to SICA and the Small
Industries Development Bank of India Act, 1989 (39 of 1989), was inserted with effect
from 17.01.2000 by Act No. 1 of 2000 of the Parliament.
Sub-section 1 starting with save as provided in sub-section 2, is a saving clause.
According to Blacks Law Dictionary3 A saving clause in a statute is an exception of a
special thing out of the general things mentioned in the statute; it is ordinarily a
restriction in a repealing act, which is intended to save rights, pending proceedings,
penalties, etc., from the annihilation which would result from an. unrestricted repeal
The meaning as set forth above clearly carves an exception for sub-section 2, thereby
preserving the contents and interpretations as stated therein.
Further, upon cursory and plain reading of language of sub-section 2, it is fairly clear that
when an Act provides, that its provisions shall be in addition to and not in derogation of
another law or laws, it means that the legislature intends that such an enactment shall coexist along with the other Acts. Further, the act of the legislature to further amend and
include SICA within the purview was also to be construed as per principles of coexistence. It is clearly not the intention of the legislature, in such a case, to annul or
detract from the provisions of other laws.
It is herein important to construe the meaning of the phrase not in derogation of.
Blacks Law Dictionary4 defines derogation as The partial repeal or abolishing of a law,
as by a subsequent act which limits its scope or impairs its utility and force.
3
4

http://thelawdictionary.org/saving-clause/

http://thelawdictionary.org/derogation/

Revival of Sick Units takes Precedence over Loan Recovery Process

Distinguished from abrogation, which means the entire repeal and annulment of a law
In the pretext of the above it is undoubtedly clear that the subsequent act cannot be in
nature of limiting the scope of relief as provided under the previous act. It necessarily has
to provide an impetus to the objectives of the previous act and not vitiate the same. The
express inclusion of the phrase not in derogation of in sub-section 2 of section 34 of
RDDBFI undoubtedly establishes that the legislature never intended to undermine the
force and utility of SICA by enacting RDDBFI but rather intended to preserve the powers
of the authorities under the SICA and save the proceedings from being overridden by the
subsequent enactment i.e. the RDDBFI.

Conclusion
Even though the judgment settles the issue of precedence of SICA over RDDBFI, the
implications are far-reaching and wide. Any defaulter possibly could apply to BIFR for
reconstruction thus delaying debt recovery process and with courts frequently staying the
recovery proceedings would just add fuel to fire to adversely affect the recovery climate
in the country. Further, it would also largely affect the value of the collateral and its
enforceability, as litigation as all know is a time consuming affair in the country. This
clearly indicates that banks and financial institution would now have to bear the brunt of
more bad loans.
It is further disheartening to see that legislations dating back as early as 1980 and 1990s
are found contradicting three decades after. It surely indicates that drafting was careless
and poor leaving it to the interpretation of the courts. Further, if the judiciary every time
assumes the role of an interpreter and gets on to the interpretational task, the concept of
having three wings of the government would lose its essence.

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