Non-Compliance With Sanctioned Scheme of Arrangement Keeps Decree Executable: Telangana HC

The Telangana High Court has declined to interfere with execution proceedings initiated by a decree holder against a company and its directors, holding that mere sanction of a scheme of arrangement under Section 391 of the Companies Act, 1956 does not automatically render a civil decree inexecutable, particularly where the company has failed to comply with the terms of the sanctioned scheme.

The Court further clarified that protection under the Sick Industrial Companies (Special Provisions) Act, 1985 cannot be invoked in the absence of proof of pending proceedings before the Board for Industrial and Financial Reconstruction (BIFR), and that guarantors cannot escape joint and several liability merely on the basis of a partial or belated payment by the principal debtor.

A single judge Bench of Justice B.R. Madhusudhan Rao dismissed a civil revision petition challenging an order of the City Civil Court at Hyderabad, which had rejected an application filed under Section 47 of the Code of Civil Procedure seeking dismissal of execution proceedings as inexecutable.

The High Court upheld the trial court’s view that no perversity or illegality was shown in permitting execution to continue, subject to adjustment of the amount already paid by the judgment debtor

The dispute arose out of a money decree passed in 2003 in favour of Margadarsi Chit Fund Limited for recovery of over Rs. 11.65 lakh with interest, jointly and severally against Kalyani Refineries Limited and its directors. The decree holder later initiated execution proceedings in 2005.

In response, the judgment debtors filed an execution application contending that the decree had become inexecutable on account of a scheme of arrangement sanctioned by the High Court of Andhra Pradesh in 2002, under which unsecured creditors were entitled only to the principal outstanding as on 30.09.1999, payable in 24 monthly instalments without interest.

The petitioners argued that once the scheme was sanctioned under Section 391 of the Companies Act, it acquired statutory force and became binding on all unsecured creditors, including dissenting creditors.

They further contended that since the company had been declared a sick industrial company and reference proceedings were pending before BIFR, execution proceedings could not be initiated without prior permission under Section 22 of SICA.

It was also argued that acceptance and encashment of a demand draft for Rs. 4,06,321 by the decree holder in 2017 amounted to full discharge of liability, thereby releasing the guarantors under Section 134 of the Indian Contract Act, 1872.

The decree holder opposed the plea, contending that the company had failed to comply with the sanctioned scheme within the stipulated time frame, that no payments were made to it under the scheme during the relevant period, and that protection under SICA was unavailable to directors and guarantors in any event.

It was further argued that joint and several liability under the decree entitled the decree holder to proceed against any of the judgment debtors of its choice.

After examining the record, the High Court noted that while a scheme of arrangement sanctioned under Section 391 is binding on unsecured creditors, such binding effect presupposes compliance with the scheme by the company.

The Court found that the scheme approved in October 2002 required payment to unsecured creditors in 24 equal monthly instalments between October 2002 and September 2004. However, the company failed to adhere to this timeline and did not make any payment to the decree holder during the relevant period. The belated payment made in June 2017, nearly 13 years after filing an affidavit before the company court, could not be treated as compliance with the scheme.

On the plea of protection under SICA, the Court held that the petitioners failed to place any material to demonstrate the pendency of BIFR or appellate proceedings at the relevant time. In the absence of proof of subsisting proceedings, the bar under Section 22 of SICA could not be invoked to stall execution.

The Court further observed that even otherwise, such statutory protection primarily extends to the sick company and not automatically to directors or guarantors.

Addressing the argument that guarantors stood discharged upon payment by the principal debtor, the Court rejected the contention, holding that discharge under Section 134 of the Contract Act would arise only if the principal debtor was validly released in accordance with law.

Since the company had failed to comply with the scheme of arrangement, it could not be said that the principal debtor’s liability stood extinguished. Consequently, the guarantors continued to remain liable under the decree.

The High Court relied on settled Supreme Court jurisprudence to reiterate that a decree holder is entitled to proceed against any of the judgment debtors in a case of joint and several liability, and that guarantors cannot insist that the creditor first exhaust remedies against the principal debtor. The Court found no perversity or jurisdictional error in the trial court’s refusal to dismiss the execution proceedings.

While dismissing the civil revision petition, the Court directed that the amount of Rs. 4,06,321 already paid and encashed by the decree holder be adjusted in the execution proceedings. Except for this limited observation, the Court declined to grant any relief to the petitioners and affirmed the continuation of execution.

Case Title: Kalyani Refineries Limited & Ors. v. Margadarsi Chit Fund Limited & Ors.

Bench: Justice B.R. Madhusudhan Rao

Date of Judgment: 06.02.2026