Delhi HC upholds constitutional validity of SICA Repeal Act, 2003

In response to a series of Writ Petitions, a Delhi High Court  bench of Justices Sanjiv Khanna and Pratibha Singh has struck down the challenges to, and upheld the constitutional validity of, certain provisions of the Sick Industrial Companies (Special Provisions) Repeal Act, 2003 (Repeal Act).

The challenges were raised in the cases of Ashapura Minichem Ltd. v. Union of India, ATV Projects (India) Ltd v. Union of India and Meghdoot Projects Ltd. v. Union of India.

While the facts of the cases are somewhat different from one another, the underlying contention was a challenge to Sections 4(b)  and 5(1)(d) of the Repeal Act.

A quick summation of the events leading up to these writ petitions is as under:

The Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) was, in November 2016, repealed by enforcing the Repeal Act, to give way to the Insolvency and Bankruptcy Code, 2016, (IBC). The Repeal Act, which was passed in 2004, was notified only on 25 November, 2016 and enforced on 1 December, 2016.

Upon enforcement of the Repeal Act, the Board of Industrial and Financial Reconstruction (BIFR) and its Appellate Authority were dissolved and all proceedings pending before them stood abated. For the cases that stood abated, an opportunity to file fresh cases with the National Company Law Tribunal (NCLT) was provided under the IBC.

One of the two challenged provisions, i.e. Section 4(b) of the Repeal Act was amended twice; both times by an Executive order. First instance of amendment was before the original provision of the Repeal Act could be enforced, on the date of its notification i.e. 25 November 2016. This amendment was brought in by the way of an amendment introduced in Section 252 of the IBC (Schedule Eight).

Thereafter, while exercising its powers under Section 242 of the IBC, the Central Government on 24 March 2017, passed a “Removal of Difficulty Order”,  which further amended this section by dividing cases pending before the BIFR into two broad categories, which became the primary ground for this challenge:

(a) where a Scheme was sanctioned under Section 18 of the SICA and;

(b) where the Scheme wasn’t sanctioned and was pending before the BIFR.

This distinction, read along with the other challenged provision which is the ‘savings clause’ i.e. Section 5(1)(d) of the Repeal Act, would mean that a scheme sanctioned under the SICA would remain unaffected despite the Repeal Act. This effectively gave a Scheme sanctioned under Section 18 of the SICA, an “approved resolution plan” status under Section 31 (1) of the IBC.

The distinction provided in a) and b) above also effectively provided a cut-off date for cases which would continue with the NCLT, and ones which would stand abated. As stated above, the ones that stood abated would have to be filed afresh with the NCLT, whereas a 90-day time period was provided to appeal against Schemes that were sanctioned under Section 18 of the SICA, only for which the time period for appeals under the SICA had not expired.

Before proceeding with the contentions raised and reasoning for the Court’s disagreement to the challenge, the following portion of the judgment is certainly noteworthy, where the Bench expressly recalls the evils under the SICA regime,

“Though not admitted, it is palpable that the petitioner, like other companies who were declared sick companies are disturbed in view of withdrawal of the protection under the umbrella of Section 22 of SIC Act, which we were aware had received adverse comments from several quarters. There were allegations of misuse and abuse of the said provision.”

The Proceedings

The petitioner’s primary grievance was that the distinction drawn between cases where Schemes were sanctioned and those where Schemes were pending, is discriminatory and violative of Article 14 of the Constitution.

On this point, the Court ruled that Article 14 accepts and does not negate or prohibit the Legislature or the Executive from determining categories which would be embraced within the scope of legislation. It went on to say that so long as the classification is based upon a rational basis and so long as the persons falling in the same class are treated alike, there is no question of violating the equality norm. Justifying the classification, the Court held,

“However, an exception has been carved out in cases where draft schemes of rehabilitation were sanctioned or approved under Section 18 (4) or (12) of the SIC Act. The reason to carve the exception is obvious and does not require much elucidation. The sick companies where schemes had been sanctioned and approved, would obviously form a separate and different class. Any provision of the Code or the Repeal Act, nullifying sanctioned rehabilitation scheme could have fallen foul on the ground of arbitrariness, especially, when there was no challenge to the sanction or approval of the rehabilitation scheme had attained finality”

The second ground for challenge was the above-mentioned cut-off date which effectively determined which proceedings were to abate and which were to continue before the NCLT.

The Court was of the opinion that it cannot be submitted that a scheme that has not been sanctioned should be treated at par with those whose schemes were sanctioned.

The Court further, in its judgment, observed that a cut-off date has to be prescribed whenever any enactment is to be enforced, a practice which stands true for  any enactment which repeals an earlier enactment. Realising that these are  matters largely relating to administration and policy, the Court refused to interfere, so long it isn’t blatantly discriminatory or arbitrary.

The third grievance contended was that Section 4(b) of the Repeal Act is ultra vires the IBC as the power to pass the Executive Order dated 24 May 2017 and 25th November 2016 did not vest. It was submitted that Section 242 is a provision which merely confers the powers to ‘remove difficulties’ in the IBC and cannot be extended to amend the extant provisions of the Repeal Act.

The Court reaffirmed its stance here and held that the  first amendment to the Repeal Act, was in fact carried out by Section 252 of the IBC, the same law which gives Central Government the power to remove difficulties (under Section 242) and in the absence of a challenge made to Section 252 of the IBC, an isolated challenge to this provision holds no merit.

(Read the judgment in the case of Ashapura Minichem Ltd. v. Union of India)