Fertilizer Corporation of India Ltd. vs. M/s. Coromandal Sacks Pvt. Ltd. (Supreme Court, 26 April 2024)
Background of the Case
Fertilizer Corporation of India Ltd. (FCIL) is a public sector company.
M/s. Coromandal Sacks Pvt. Ltd. is a private company supplying HDPE bags to FCIL.
There was a commercial dispute between the parties: Coromandal Sacks claimed that FCIL owed them money for supplies, including:
Price differences
Liquidated damages wrongly deducted
Losses due to rejected supplies
Interest on delayed payments under the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993
FCIL, meanwhile, had been declared a “sick company” under the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA).
FCIL argued that, under Section 22(1) of SICA, no legal proceedings could be filed against a sick company while rehabilitation proceedings were pending.
Legal Issues
The Supreme Court had to address two main issues:
Applicability of Section 22(1) of SICA:
Does Section 22(1) bar a civil suit for recovery of money against a sick company?
FCIL argued the suit should be stayed because the company was under rehabilitation.
Award of Interest:
Was the 24% compound interest granted by the High Court under the 1993 Act valid?
How should the interest be calculated, especially considering the period when FCIL was a sick company?
Arguments
For Coromandal Sacks:
They were entitled to recover dues under the 1993 Act.
Section 22(1) does not bar claims for recovery; it only prevents actions that interfere with the rehabilitation process.
The interest for delayed payment is a legal right of small-scale industrial suppliers.
For FCIL:
Section 22(1) bars legal proceedings against sick companies.
The civil suit for recovery could affect the rehabilitation process.
Interest should not be calculated during the period when the company was under sickness proceedings.
Supreme Court Judgment
Section 22(1) of SICA:
The Court clarified that Section 22(1) does not automatically bar all legal proceedings.
The bar applies only to actions that interfere with the rehabilitation scheme of a sick company.
A civil suit for recovery of money does not necessarily interfere with rehabilitation, so Coromandal Sacks could pursue its claim.
Award of Interest:
The Court upheld the 24% compound interest awarded under the 1993 Act.
However, the Court excluded the period during which FCIL was officially a sick company.
Interest is to be calculated at 24% per annum with monthly compounding, excluding the sickness period.
Outcome
The Supreme Court allowed Coromandal Sacks to recover its dues.
FCIL’s claim that Section 22(1) barred the suit was rejected.
Interest was granted at 24% per annum, but adjusted to exclude the sick period.
Significance
Clarifies Section 22(1) of SICA:
Only proceedings that directly affect rehabilitation are barred.
Recovery suits that do not interfere with rehabilitation can proceed.
Protects small-scale suppliers:
Reinforces rights under the 1993 Act for timely payments and interest on delayed dues.
Balances interests:
Ensures sick companies are protected from disruptive claims but also prevents abuse of the sick company status to avoid payments to legitimate creditors.
Summary:
This case establishes that sick companies cannot avoid legal liability for debts owed to suppliers if those claims do not interfere with their rehabilitation. It also confirms the right of small-scale industrial suppliers to claim interest for delayed payments under the 1993 Act, with adjustments for the period of sickness.
RELATED Blog
0 comments