Tata case sets precedent for sick companies

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The interpretation of the provisions of the Sick Industrial Companies (Special Provisions) Act, 1984, (SICA) and the Companies Act, 1956, recently arose before the Supreme Court of India in Tata Motors Ltd v Pharmaceutical Products of India Ltd and Ors. The judgment explained that a high court had no jurisdiction to sanction a scheme of arrangement presented by a sick company if the company’s revival scheme was pending before the Appellate Authority for Industrial and Financial Reconstruction (AAIFR). In this case, Pharmaceutical Products (PPI) had taken a loan from Tata Motors and failed to repay it. The matter went to arbitration and an award was passed in favour of Tata Motors.

PPI subsequently made a reference in terms of section 15 of SICA to the Board for Industrial and Financial Reconstruction (BIFR), which passed an order recommending the winding-up of the pharmaceutical company. SICA is a special public beneficial statute enacted to secure the principles specified in Article 39 of the Constitution of India, and a complete code in itself. However, on appeal to the AAIFR, a scheme was proposed in which Tata Motors was excluded. Even though the matter was pending before the AAIFR, PPI submitted a merger scheme before the Bombay High Court which was approved. The AAIFR also approved the merger on the same lines and the BIFR followed suit.

Aggrieved, Tata Motors challenged the scheme by filing an appeal before the Supreme Court of India, contending that the high court had no jurisdiction to sanction a scheme for a company which stood before the BIFR. The Supreme Court allowed the appeal, overruling not only the judgment of the high court, but also the orders of the BIFR and AAIFR, stating that the provisions of SICA, containing non-obstante clauses in sections 20 (4) and 32, would prevail over the provisions of the Companies Act. The jurisdiction of the company court in such matters would arise only if the BIFR or AAIFR had exercised jurisdiction under section 20 of SICA, recommending the winding-up of a company where no chance of revival was perceived.

Section 26 of SICA bars the jurisdiction of civil courts, which not only covers orders passed under SICA, but also matters which the BIFR is empowered to determine. The Supreme Court maintained that the jurisdiction of the high court, despite not being a civil court, was invalid with respect to matters for which the AAIFR or the BIFR had been empowered. The case was remitted to the BIFR to proceed afresh in accordance with the provisions of the law.

The update of court judgments is compiled by Bhasin & Co, a corporate law firm based in New Delhi. The authors can be contacted at [email protected] or [email protected] Readers should not act on the basis of this information without seeking professional legal advice.