Provisions of SICA to prevail over Companies Act even after a winding up order is passed: Supreme Court

The three-Judge Bench of the Supreme Court of India in the case of Madura Coats Limited ("the Appellant")vs. Modi Rubber Ltd. (the Respondent") and Ors., decided on June 29, 2016, has observed that the winding up proceedings before the Company Court cannot continue after a reference has been registered by the Board for Industrial and Financial Reconstruction ("BIFR") and an enquiry has been initiated under Section 16 of the Sick Industrial Companies (Special Provisions) Act, 1985 ("SICA").

Company Court had passed winding up order against the Respondent and official liquidator was also appointed to take charge of the assets of the Respondent and to submit a report along with the inventory. The Board of Directors of the Respondent had passed a resolution to file a reference before the BIFR under the provisions of SICA and after due procedure, reference to BIFR was registered. It is pertinent to note that while the application for reference was sent to the BIFR before the winding up order was passed by the Company Court, the reference was actually registered with the BIFR after the winding up order was passed by the Company Court. Thereafter, BIFR sanctioned the rehabilitation scheme under SICA, also making provision for unsecured creditors (including the Appellant). Some payment was also made by the Respondent to the Appellant pursuant to an order of the Company Court.

The Division Bench of the Allahabad High Court ("HC") had allowed the Special Appeal of the Respondent and had stayed further proceedings before the Company Court till a final decision was taken on the reference made by the Respondent to the BIFR. This decision of HC was under challenge before the apex Court.

The Supreme Court considered different situations that can arise in the interplay between the Companies Act and the SICA in the matter of winding up of a company, looking at its earlier rulings.

According to the Supreme Court, this appeal from HC decision was squarely covered by the primacy given to the provisions of the SICA over the Companies Act as delineated in its earlier rulings namely, Real Value Appliances Ltd. v. Canara Bank and Rishabh Agro Industries Ltd. v. P.N.B. Capital Services Ltd. The apex Court also took note of the subsequent developments in the case and the fact that the Appellant had participated before the BIFR and had taken its dues in terms of the rehabilitation scheme.

The Supreme Court observed that whatever may be situation, whenever a reference is made to the BIFR under Sections 15 and 16 of SICA, the provisions of SICA would come into play and they would prevail over the provisions of the Companies Act. Court affirmed the view taken by the HC in concluding that the winding up proceedings before the Company Court cannot continue after a reference has been registered by the BIFR and an enquiry initiated under Section 16 of SICA.

VA View

Adding to the significant rulings in the past by the Supreme Court on this issue, this is yet another judgment pronouncing its stance on the issue concerning primacy of SICA over the Companies Act in certain cases. By this ruling, the apex court has affirmed its ruling in the case of Tata Motors Ltd. v. Pharmaceutical Products of India Ltd, (2008) 7 SCC 619, making it clear that, different situations can arise in the process of winding up a company under the Companies Act but whatever be the situation, whenever a reference is made to the BIFR under Sections 15 and 16 of the SICA, the provisions of the SICA would come into play and would prevail over the provisions of the Companies Act and proceedings under the Companies Act must give way to proceedings under the SICA.

II. Minimize interference with arbitration process as that is the forum of choice: Delhi High Court Division Bench

The Delhi High Court (Division Bench) ("the Delhi HC") in the case of Mcdonald's India Private Limited("McDonald") vs. Vikram Bakshi ("Vikram") and Ors. (collectively "the respondents), decided on July 21, 2016, has observed that Courts should minimize interference with arbitration process, which is the policy discernible from the Arbitration and Conciliation Act, 1996 ("Arbitration Act").

McDonald, Vikram and the McDonald's Corporation, U.S.A. entered into a joint venture agreement ("JVA") for setting up and operating McDonald's restaurants initially within the National Capital Region of Delhi on a nonexclusive basis. Essentially, the agreement was between McDonald and Vikram and, McDonald's Corporation, U.S.A. was a confirming party. The Delhi HC referred to relevant clauses of the JVA and the major developments that took place after the execution of JVA. The crux of the dispute was that McDonald wanted to exercise call option under the JVA as Vikram ceased to be the Managing Director of a company incorporated pursuant to provisions of JVA ("said company"). The Company petition before the Company Law Board ("CLB") came to be filed by Vikram and another alleging oppression and mismanagement against McDonald and seeking reinstatement of Vikram as the Managing Director of said company. An order was passed by CLB directing McDonald to maintain status quo over the shareholding, board pattern and right of call option. Thereafter, McDonald terminated the JVA and instituted arbitration proceedings in the London Court of International Arbitration. By an order of the Single Judge of the Delhi High Court, McDonald was restrained from pursuing the arbitration proceedings until, inter alia, the status quo order passed by CLB was vacated.

The contention of the respondents was that arbitration proceedings at London would be vexatious and oppressive. Several case laws on this and related points were discussed by the Delhi HC. The Delhi HC observed that unless and until a party seeking an anti-arbitration injunction can demonstrably show that the arbitration agreement is null and void, inoperative or incapable of being performed, no such relief can be granted in the suit or as an interim measure therein. The Delhi HC was of the view that the finding of the learned single Judge that the arbitration agreement in the present case is incapable of performance or inoperative because of the pendency of the proceedings in the CLB was not sound. According to the Delhi HC, even if it was assumed that Part I of Arbitration Act was to apply, then also, because of the provisions of Section 8 of the Arbitration Act, the judicial authority was obliged to refer the parties to arbitration, as, the Delhi HC noted that, there is now a mandate to refer the parties to arbitration unless the court finds that prima facie no valid arbitration agreement exists.

The Delhi HC finally concluded that the circumstances of invalidity of the arbitration agreement or it being inoperative or incapable of being performed did not exist in this case and observed, "Courts must be extremely circumspect and, indeed, reluctant to thwart arbitration proceedings. Thus, while courts in India may have the power to injunct arbitration proceedings, they must exercise that power rarely and only on principles analogous to those found in sections 8 and 45, as the case may be, of the 1996 Act."