Guarantors have no protection before BIFR
An order restraining recovery proceedings against an Industrial Company issued by
BIFR under provisions of SICA does not cover guarantors of the company's loans. Banks are free to move the Debts Recovery Tribunals (DRT) and proceed against the guarantors of the loans to the company even though they cannot proceed against the company in terms of the stay granted by the BIFR u/s 22 of SICA.
When an Industrial concern becomes sick, an application can be filed before the Bureau of Industrial and Financial Reconstruction (BIFR) under provisions of the Sick Industrial Companies (Special Provisions) Act [SICA]. The BIFR, on consideration of the facts of the case, and if it is satisfied that there exists sufficient grounds, issues an order prohibiting proceeding all creditors from proceeding against the industrial concern.
Provisions of Sick Industrial Companies (Special Provisions) Act, 1958 (SICA) are meant to protect companies from multiplicity of proceedings from lenders and others, and to explore the possibility of rehabilitating and reviving the company. Guarantors and other defendants do not fall under the category of a company' who may need any assistance to revive themselves under the Act. The normal rule position is that once the BIFR admits an application from a sick company and passes an order u/S 22 of SICA, no proceedings can be instituted and/or continued against the company without express permission of the BIR.
The Section reads as under:
"22. Suspension of legal proceedings, contracts, etc.-(I) Where in respect of an industrial company, an inquiry under Sec. 16 is pending or any scheme referred to under Sec. 17 is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal under Sec. 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."
After enactment of the Recovery of Debts Due to Banks and Financial Institutions Act (RDB Act) most acts were not saved. The RDB Act superseded all other Acts that were not specifically saved, and these Acts became nul and void if they clashed with the RDB Act. However, S. 34 of the RDB Act saved the provisions of SICA. The RDB Act has to be read along with SICA and vice versa. Therefore proceedings before DRT are subject to orders etc passed by the BIFR.
It is fairly well settled that institution of proceedings, and/or admittance of an application by the BIFR is not sufficient to grant protection to a company. There must be a specific order to that effect u/s 22 of SICA from the BIFR. The wordings of S. 22 of SICA are such that it is intended to save only companies from institutions and continuation of proceedings. Even when an order u/S 22 of SICA is passed by the BIFR, only the company is saved from various proceedings. This benefit is however not available to guarantors and other defendants of the company.
The issue has come up before the Supreme Court in the matter of Kailash Nath Agarwal and Ors.V/s Pradeshiya Industrial & Investment Corporation of U.P. Ltd. [10 2003 02 14 1 ]. After considering various issues and meaning of the terms used in the Act it was held that benefit of prohibition orders issued by BIFR under SICA would not be available to the guarantors of a company. A similar issue had come up before the DRAT Chennai. Following the decision of the Supreme Court the Hon'ble DRAT dismissed the appeal and permitted the Bank to proceed against the guarantors of the Company.
It is now well settled that Banks can proceed against the guarantors of the company even as there is a prohibition from BIFR from proceeding against the company itself.
In BIFR proceedings, Guarantors cannot seek better protection than the principle borrower.
for more articles on these matters you can visit http://www.bankdrt.com.
Some useful links on the site on the same sbject are as follows :
Proceedings under SRFAESIA cannot take place when BIFR is seized of the issue.
http://www.bankdrt.com/nf/news/read_full_news.php?id=J00020040701002
Guarantors can peruse Appellate Remedies on their own.
http://www.bankdrt.com/nf/news/read_full_news.php?id=J00020040930003 Guarantors have no protection before BIFR
By: AV BAGUR
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