The Bombay High Court has clarified that when a rehabilitation scheme under the Sick Industrial Companies (Special Provisions) Act, 1985 fails, creditors are entitled to claim pendente lite interest at the contractual rate from the date of filing of the original suit. This judgment reinforces the principle that statutory moratoriums do not extinguish contractual rights once the rehabilitation process is formally abandoned.
Background & Facts
The Dispute
The petitioner, State Bank of India, advanced 15 separate credit facilities to Shree Sajjan Mills Limited between 1978 and 1987, secured by pledges, hypothecations, and mortgages. When the company defaulted, the bank filed a suit for recovery of Rs. 8,27,21,045.01 on 31.03.1987 in the Bombay High Court. The company was later declared sick by the Board for Industrial and Financial Reconstruction (BIFR) in 1990, triggering proceedings under the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA). A rehabilitation scheme was approved by the Appellate Authority for Industrial and Financial Reconstruction (AAIFR) in 1996, but it failed by 1999, when the AAIFR explicitly declared that creditors were free to pursue their suits.
Key Facts
- The petitioner bank filed Suit No. 1142 of 1987 on 31.03.1987 for recovery of Rs. 8,27,21,045.01 plus contractual interest at 17.5% and 18.5% per annum
- On 04.04.1986, Madhya Pradesh High Court appointed a provisional liquidator
- On 06.10.1989, the Government of Madhya Pradesh took over the company and entered into an agreement with the bank, MPSTCL, and the company, stipulating that suits would continue
- On 21.05.1990, BIFR declared the company sick and appointed IDBI as operating agency
- On 07.01.1994, BIFR recommended winding up; AAIFR approved a revival scheme on 09.07.1996
- On 18.05.1999, AAIFR recorded that the rehabilitation scheme had failed and declared creditors free to pursue suits
- On 23.08.1999, AAIFR directed winding up and transferred proceedings to Madhya Pradesh High Court
- On 25.02.2002, DRT Jabalpur granted interest at 16.5% per annum with quarterly rests in a parallel proceeding (O.A. No. 376 of 2000)
- On 22.05.2006, the bank issued a 'No Due Certificate' to the Government of Madhya Pradesh after receiving Rs. 1.91 crores, explicitly stating it was issued without prejudice to rights against the company and other guarantors
- On 04.04.2006, DRT Mumbai granted only 6% pendente lite interest from 01.01.2001, ignoring contractual rate and suit filing date
Procedural History
- 31.03.1987: Suit No. 1142 of 1987 filed in Bombay High Court
- 04.04.1986: Provisional liquidator appointed by Madhya Pradesh High Court
- 06.10.1989: Government of Madhya Pradesh takes over company; agreement executed
- 21.05.1990: BIFR declares company sick
- 09.07.1996: AAIFR approves rehabilitation scheme
- 18.05.1999: AAIFR records failure of rehabilitation scheme; creditors free to pursue suits
- 23.08.1999: AAIFR directs winding up and transfer of proceedings
- 2000: Suit transferred to DRT Mumbai as O.A. No. 2481 of 2000
- 25.02.2002: DRT Jabalpur grants 16.5% interest in parallel proceeding
- 26.03.2003: Respondents file written statements in DRT Mumbai
- 04.04.2006: DRT Mumbai passes order granting only 6% interest from 01.01.2001
- 02.09.2007: DRT rejects review application on limitation grounds, but proceeds to examine merits
- 18.12.2015: DRAT dismisses appeal, upholding DRT order
- 05.03.2026: Writ petition reserved for judgment
- 04.05.2026: Judgment pronounced
The Parties' Positions
For the Petitioner (State Bank of India)
- Argued that contractual interest rate (17.5%-18.5%) must be applied from 31.03.1987 as the suit was filed before SICA proceedings
- Contended that AAIFR’s 1999 declaration of scheme failure revived full contractual rights
- Relied on Industrial Credit & Development Syndicate v. Smithaben H. Patel (1999) 3 SCC 80 for appropriation of payments first towards interest
- Highlighted that DRT Jabalpur had granted 16.5% interest in a parallel case
- Asserted that No Due Certificate issued to Government of Madhya Pradesh did not waive rights against the company
For the Respondents
- Respondent No.1: Argued that SICA moratorium and rehabilitation scheme barred pendente lite interest; relied on Fertilizer Corporation of India v. Coromandal Sacks (2024) 8 SCC 172
- Argued that acceptance of OTS with Government of Madhya Pradesh implied waiver of higher interest claims
- Respondents 2(a), 2(b), 3(a), 3(b), 4(a), 4(b): Claimed no personal liability as heirs of original guarantors; no inheritance of substantial assets
Relief Sought
The petitioner sought:
- Grant of pendente lite interest at contractual rate (17.5%-18.5%) from 31.03.1987
- Alternatively, interest at 16.5% per annum with quarterly rests from 31.03.1987, as granted by DRT Jabalpur
- Correction of appropriation of payments to apply first to interest, then principal
- Setting aside of DRT and DRAT orders dated 04.04.2006, 02.09.2007, and 18.12.2015
The Legal Issue
The central question was whether pendente lite interest at the contractual rate must be granted by a Debts Recovery Tribunal after a rehabilitation scheme under SICA has been formally declared failed by the AAIFR, and whether the failure to consider such interest constitutes a legal error warranting judicial intervention.
Arguments Presented
For the Appellant/Petitioner
The petitioner bank relied on the Supreme Court’s decision in Industrial Credit & Development Syndicate v. Smithaben H. Patel (1999) 3 SCC 80, which affirmed the common law principle that payments must first be appropriated towards interest before principal. It argued that the AAIFR’s 1999 order explicitly terminated the moratorium and restored creditors’ rights to pursue full contractual remedies. The bank emphasized that the DRT Jabalpur had already granted 16.5% interest in a parallel proceeding involving the same company, and that the DRT Mumbai’s failure to do so was arbitrary. It further contended that the No Due Certificate issued to the Government of Madhya Pradesh was expressly qualified to preserve rights against the company and other guarantors.
For the Respondent/State
Respondent No.1 contended that the SICA regime imposed a statutory moratorium on interest accrual during the rehabilitation period, citing Fertilizer Corporation of India v. Coromandal Sacks (2024) 8 SCC 172. It argued that the bank’s acceptance of partial payment under the OTS with the Government of Madhya Pradesh implied acquiescence to reduced interest liability. The respondents also challenged the maintainability of the writ petition under Article 227, asserting that the High Court could not substitute its view for that of the DRT and DRAT on factual appreciation.
The Court's Analysis
The Court conducted a meticulous review of the impugned orders and found that neither the DRT nor the DRAT had addressed the petitioner’s core contention: the entitlement to pendente lite interest from the date of filing of the suit. The DRT’s order dated 04.04.2006 mentioned interest at 6% in a single paragraph without any reasoning, and failed to reference the contractual rate or the suit filing date. The DRAT’s order dated 18.12.2015 focused exclusively on the OTS and payments received, ignoring the legal basis for interest entitlement.
"The DRT reached a conclusion that interest @6% per annum was payable. There is no discussion on the specific grounds raised in the review application on behalf of the petitioner bank."
The Court distinguished Fertilizer Corporation of India v. Coromandal Sacks by noting that the Supreme Court in that case excluded interest only during the period the company was under rehabilitation - not after its failure. Since the AAIFR had explicitly declared the scheme failed on 18.05.1999, the moratorium ceased to operate. The Court held that the bank’s right to contractual interest revived from that date, and the interest must be calculated from the date of filing of the original suit, as the claim was never abandoned.
The Court further affirmed the principle from Industrial Credit & Development Syndicate v. Smithaben H. Patel that payments must be appropriated first to interest and then to principal, unless otherwise agreed. The DRT’s direction to apply payments to principal first was legally erroneous.
While the petitioner sought contractual rates of 17.5%-18.5%, the Court exercised judicial restraint and adopted the 16.5% rate granted by the DRT Jabalpur in a parallel proceeding involving the same debtor. This ensured uniformity and avoided judicial overreach while still vindicating the bank’s right to meaningful interest.
The Verdict
The writ petition is partly allowed. The impugned orders dated 04.04.2006, 02.09.2007, and 18.12.2015 are modified. The amounts payable by the respondents shall bear pendente lite interest at 16.5% per annum with quarterly rests from 31.03.1987, the date of filing of Suit No. 1142 of 1987, until actual payment. Payments received during the pendency of proceedings shall be first appropriated towards interest and then towards principal. All pending applications stand disposed of.
What This Means For Similar Cases
Pendente Lite Interest Survives Post-Rehabilitation
- Practitioners must assert contractual interest from the date of suit filing even after SICA proceedings, provided the rehabilitation scheme has been formally declared failed
- The AAIFR’s 1999 declaration operates as a legal reset - interest accrual resumes from the original filing date
- Failure to grant such interest constitutes a jurisdictional error, not merely a factual oversight
Appropriation of Payments Must Follow Legal Presumption
- In recovery proceedings, payments must be applied first to interest, then to principal, unless the creditor expressly agrees otherwise
- The burden of proving contrary agreement lies on the debtor
- DRTs and DRATs must record explicit findings on appropriation; silent orders are vulnerable to challenge
Uniformity Across Parallel Proceedings Is Judicially Mandated
- When identical claims are adjudicated in different DRTs, courts must ensure consistency in interest rates
- Arbitrariness in granting interest across parallel proceedings invites writ jurisdiction
- Adopting a rate granted in a parallel proceeding is not substitution of opinion but correction of inconsistency
