The Hindu Business Line : Why it does not help to shirk in the name of sickness

SECTION 22 of the Sick Industrial Companies Act (SICA), a favourite with many sick companies, provides that no proceedings for the winding up, execution, distress sale or the like against any of the properties of the sick 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 shall lie or be proceeded with in case an inquiry under Section 16 is pending or any scheme referred to under Section 17 is under preparation or where an appeal under Section 25 is pending in spite of anything mentioned in any other law.

Although many courts have heard and ruled cases under this section, sick companies keep knocking on the doors of the court with an air of Socratic Irony whenever a creditor raises his voice. Gulabdas Neo forced Ambuja Cement Eastern Ltd (ACEL) to appeal to the Madhya Pradesh High Court in Gulabdas Neo vs Ambuja Cement Eastern Ltd And Ors (2004 48 (1) CC Reports 768).

Case laws

Guladbas, a painter by profession, was approached by ACEL to do some painting work on the merger of Modi Cements with it. Between April 1997 and December 1997, he raised bills totalling Rs 56,236 on ACEL which were unpaid. He filed a civil suit which was decreed and Gulabdas filed an execution petition. ACEL countered by saying that Gulabdas is not a creditor of the company since his bill is only for labour charges. It also went to the extent of stating that there is no proof of work.

The MP High Court quoted from Shree Chamundi Mopeds Ltd vs Church of South India Trust Association, Madras AIR (1992 SC 1439), wherein the apex court held that Section 22(1) seeks to advance the object of the Act by ensuring that a proceeding having an effect on the working or the finances of a sick industrial company shall not be instituted or continued during the period the matter is under consideration before the board or the appellate authority or a sanctioned scheme is under implementation without the consent of the board or the appellate authority.

In Baburao R Tawade vs Hes Ltd (1995 Lab IC 2200), it was held that BIFR approval was not necessary for recovery of the dues of workmen. The Supreme Court, in Modi Industries Ltd vs Addl Labour Commissioner, Ghazaibad, doubted whether Parliament could have intended that an industrial unit under the garb of sickness or for any like difficulty be allowed to shrink its liability to pay the wages to its workers. In Keshri Steels vs MP Electricity Board (1998 2 MPLJ 535), the company claimed that it is not due to pay electricity charges too, thanks to the ubiquitous Section 22. The court pooh-poohed the argument. The only case that seemed to assist ACEL was Gram Panchayat vs Shree Vallabh Glass Works Ltd (1990 2 SCC 440), where it was ruled that a gram panchayat is not entitled to recover property tax and other amounts due from the company by initiating coercive proceedings under Section 129 of the Bombay Village Panchayat Act, 1952 without the consent of the board. However, this case was distinguished in that property tax could not be equated with payment of labour charges.

The apex court, in Patheja Bros. Forgings and Stampings vs ICICI Ltd (2000 6 SCC 545), held that the wordings in Section 22 are crystal clear — no suit for the enforcement of a guarantee in respect of a loan or advance would lie. In Rishabh Agro Industries vs P.N.B. Capital Services Ltd (2000 5 SCC 515), the objects of SICA were defined to mean, inter alia, providing efficient machinery for expeditious determination by a body of experts to safeguard the economy of the country and protect viably sick units. Considering the background of the case, the MP High Court ruled that labour charges would be out of the purview of Section 22.

Amendment

Apart from proving that a painter and his money are not easily parted, this case brings out the fact that it is time that the Government amended the immunity section in the revised Sick Companies Bill to specify items that do not qualify for the immunity.

(The author is a Hyderabad-based chartered accountant.)

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