Supreme Court Rules Unsecured Creditors Must Accept Scaled Down Dues under Rehabilitation Scheme: Landmark Judgment

In a landmark judgment , the Supreme Court of India has ruled that unsecured creditors cannot opt out of rehabilitation schemes and refuse to accept the scaled down value of their dues. The court emphasized that the rehabilitation scheme prepared under Section 18 of the Sick Industrial Companies (Special Provisions) Act, 1985 binds all creditors, including unsecured creditors, who are required to accept the revised payment terms.

The judgment stated, "Unless and until there is a sacrifice by all concerned, including the creditors, financial institutions, unsecured creditors, laborers, there shall not be any revival of the sick industrial company." This decision carries significant implications for the revival of financially distressed companies and the implementation of rehabilitation schemes.

The bench, comprising Justices M.R. Shah and Sudhanshu D., emphasized the objective of the Act, which is the revival of sick industrial companies. The court highlighted the need for sacrifices by all stakeholders in order to make the revival efforts successful. It further stated that if unsecured creditors were allowed to opt out of the rehabilitation scheme, it would frustrate the purpose of the legislation.

The judgment also clarified that the rehabilitation scheme, once sanctioned by the Board for Industrial and Financial Reconstruction (BIFR), is binding on all stakeholders, including shareholders, creditors, guarantors, and employees of the sick company. It pointed out that unsecured creditors may receive a portion of their dues through the rehabilitation scheme, which they would not otherwise receive in the event of the company's liquidation.

The Supreme Court set aside a previous decision of the Delhi High Court, which allowed unsecured creditors to wait for the scheme to be implemented fully before recovering their debts with interest. The court held that this view was erroneous and contrary to the scheme of the Sick Industrial Companies (Special Provisions) Act, 1985.

Date of Decision: March 17, 2023

Modi Rubber Limited   VS Continental Carbon India Ltd.                                   

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