ABATEMENT OF PROCEEDINGS UNDER SICA LEAVES STAKEHOLDERS IN A STATE OF QUANDARY

When secured creditors take any action under Section 13(4) of the SARFAESI Act in relation to enforce their security interest in a sick industrial company as defined under the Sick Industrial Companies [Special Provisions] Act, 1985 [SICA], the proceedings before the Board for Industrial and Financial Reconstruction [BIFR] abates by operation of law. The law does not envisage a formal posting before BIFR in order to declare that the proceedings pending adjudication by BIFR have been abated. Therefore the moment such an action takes place, the proceedings before BIFR abates. Abatement terminates proceedings without any bearing on the merits. BIFR by itself or AAIFR in an appeal cannot revive a reference that has got abated in pursuance of law. Abatement takes place instantaneously. It opens the floodgates for any person to initiate any legal proceeding which may be in the nature of a distress or winding up. The irony is that while secured creditors will have the last laugh, and if the company is not in winding up [as it would not be, being a sick industrial company], all other stakeholders will be in a fluid situation. This could enable the promoters to tie up or team up with secured creditors or even otherwise, and alienate the other valuable assets or rights and ditch the unsecured creditors / sundry creditors! In such a case legal system will only be a silent spectator. Even in respect of non-sick industrial company, if the company is not in winding up, if the secured assets of the company sold in auction due to an action under Section 13(4) of SARFAESI Act, such a situation would prevail. The only remedy in such a case would be to initiate any action for the winding up of the company and see if proceedings are necessary to be taken out under various sections dealing with fraudulent preference or misfeasance or other offences including falsification of books of account. Thus legal system leaves stakeholders in a limbo. The proviso under sub-section (9) of Section 13 of SARFAESI Act stating that in the case of a company in liquidation Section 529A would apply does not offer much assistance because that would also assist only if the company is in winding up. Therefore there is a good case for amending SICA and also SARFAESI Act to remedy this mischief!    

parties to private agreement could agree restrictive covenants relating to transfer of shares

The division Bench of the Bombay High Court holds that in a private agreement parties may agree to certain covenants restricting their right to transfer shares held by them in a public company and such restrictions are not hit by Section 111A of the Companies Act, 1956. Section 111A states that shares of public company are freely transferable.The division bench of the HC held in its decision dated 01/09/2010 that the expression "freely transferable" in Section 111A does not mean that the shareholder cannot enter into consensual arrangement/agreement with the third party (proposed transferee) in relation to his specific shares. The division bench delared that they do not accept the view taken by the single judge in the Western Maharashtra Development Corpn V Bajaj Auto Case dated 15/02/2010!