EVOLUTION OF SICK INDUSTRIAL PROVISIONS IN

INDIA

CHAPTER I

INTRODUCTION

India did not have a comprehensive legislation that

dealt wholly with corporate insolvency. Instead it had a number

of statutory provisions and several agencies with overlapping

jurisdiction, which made the entire process time consuming and

cumbersome. As far as industrial sickness is concerned the first

attempt that was made by the government to provide for a

comprehensive legislative framework was the Sick Industrial Companies

(Special Provisions) Act, 1985 which provided for the establishment of a

quasi-judicial body- Board for Industrial and Financial

Reconstruction (BIFR) that took measures for revival and

rehabilitation of potentially sick industrial undertakings and

for the liquidation of non-viable companies.

Prior to the coming into force of SICA, the liquidation

of a financially distressed or ‘sick’ industries was dealt with

under Part VII of the Companies Act, 1956 spanning 135 sections

and the highest authority for steering the process was the High

Court of the state concerned. The liquidation cases (especially

the involuntary liquidations)1 more often than not met the same1 Under the Act liquidation of a company may be carried out in two modes: voluntary liquidation by the creditors and compulsory or involuntary

fate as other judicial proceedings and were plagued with

inordinate delays. This prompted the government to enact a

comprehensive legislation and SICA came into being which reduced

the involvement of the High Courts. Unfortunately SICA proved to

be a big failure.

Consequently, the Government of India, in the year 1999

set up a High Level Committee headed by Justice V.B. Balakrishna Eradi, a retired

Judge of Supreme Court for refurbishing the existing laws relating

to insolvency and winding up of companies which recommended inter

alia:

The setting up of a National Company Law Tribunal (NCLT),

to be entrusted with the tasks of BIFR, the repeal of

SICA and reintegration of the ameliorative, revival and

reconstruction procedures in the 1956 Act while doing

away with a regressive provision like section 22 of SICA,

1985.

Remodeling the Indian corporate bankruptcy laws on

international lines thereby selling off assets first and

then adjudicating the claims and distributing the

proceeds.2

In 2001, the Advisory Group on Bankruptcy Laws3 headed by Dr.

N.L. Mitra recommended the formulation of a comprehensive corporate

liquidation by the Court.2 Asha Rani, ‘Alleviation of industrial sickness: a critical study’ 3 Report of the Advisory Group on Bankruptcy Law, <http://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/20811.pdf> accessed 23rd Feb 2014

bankruptcy code4 and the complete repeal of SICA and abolition of

BIFR. In response, the Government enacted the Companies (Second

Amendment) Act, 2002 which provided for the establishment of the

NCLT and its appellate authority the NCLAT5 to take over the work

done by BIFR, AAIFR and the High Courts in matters relating to

insolvency, the amendment of the Companies Act, 1956 and the

incorporation of various provision of SICA in the form of Part

VIA. The Sick Industrial Companies (Special Provisions) Repeal

Act, 2003 repealed SICA and formally abolished BIFR and AAIFR.

However these changes could not be brought into effect immediately, and the

above enactments and institutions continue to prevail primarily

because:

The constitutionality of the proposed NCLT was challenged in

Thiru R. Gandhi, President, Madras Bar Association v. Union of India6.

However, the Supreme Court on 11th May, 2010 ruled that the

provisions of Companies (Second Amendment) Act, 2002

pertaining to transfer of several judicial and quasi-

judicial powers to NCLT are constitutionally valid subject

to amendments being made to make the Tribunal’s members

independent. 7

4 The Advisory Group recommended that the corporate bankruptcy code which would incorporate the provisions relating to reorganisation, renegotiation (similar to Chapter XI proceedings of US Bankruptcy Code), corporate insolvency leading to winding up and liquidation of a corporate entity and settlement of all other related issues.5 National Company Law Appellate Tribunal6 (2004) 120 Com Cases 210 (Mad)7 Avimukt Dar, ‘National Company Law Tribunal under the new Companies Act, 2013’, <http://www.assocham.org/events/recent/event_930/Avimukt-Dar.pdf> accessed 25th Feb 2014

Several provisions of the Companies (Second Amendment) Act,

2002 and the SICA (Special Provisions) Repeal Act, 2003 were

not notified and hence not brought into effect.

The Companies Act, 2013 may be considered as the last

leg of the evolution of the legal provisions pertaining to sick

industrial companies.

CHAPT

ER II

SICA, 1985 AND THE CHANGES BROUGHT ABOUT BY THECOMPANIES

(SECOND AMENDMENT) ACT,2002

SICA was perceived as a beneficial piece of legislation

enacted in public interest with the twin objective of timely detection

of sick and potentially sick companies and the speedy determination by the BIFR

of the preventive, ameliorative, remedial and other measures which need to

be taken with respect to such companies.8 It applied to all

industrial companies in the public and private sector being an industry

specified in the First Schedule of the Industries (Development and Regulation) Act,

1951 subject to certain exceptions.9 8 The Sick Industrial Companies (Special Provisions) Act, 1985, <http://legalpundits.com/Content_folder/SICKA24092008.pdf> accessed 25th Feb, 20149 The Act does not apply to:(a) industries relating to ships and other vessels drawn by man power,(b) ancillary industrial undertaking as defined in section 3(aa) of Industries(Development and Regulation) Act, 1951.(c) small scale industrial undertaking defined in section 3(j) of Industries (Development and Regulation) Act, 1951

2.1. REASONS FOR THE FAILURE OF SICA:

SICA, unfortunately proved to be a major failure. Some

companies viewed SICA as an official exit route. It not only

salvaged them from the harsh legal proceedings but also gave

access to various relief and concessions from the financial

institutions.10 Section 2211 of SICA proved to be disastrous for the

banking sector and the quantum of non-performing assets increased

at an alarming rate.12 The process for rehabilitation as

prescribed under the Act was amenable to delays and did not

provide a balanced framework for all stakeholders. Some of the

reasons for the delays included the workload of BIFR, the

‘dilatory tactics’13 adopted by the management14 and the workers

like not providing appropriate financial records to the Board and

‘lack of cooperation by creditors when called in to make

concessions’. Banks and financial institutions alleged that

companies were turning to the BIFR to escape the repayment of

loans or that management had forced the companies into sickness,10 Section 19 of SICA made provisions for rehabilitation of a sick company by giving financial assistance by way of loans, advances or guarantees or reliefsor concessions or sacrifices from Central Government, State Government, any scheduled or other bank, a public financial or state level institution etc.11 Section 22 of SICA talks of suspension of legal proceedings, contracts etc.thus providing complete immunity from legal suits, recovery proceedings and winding up petitions made during the inquiry and implementation of the scheme.12 Purnima Mishra, ‘The provisions of SICA and Companies Act’ <http://www.icaiejournal.org/Journal/792_2004_3.pdf> accessed 25th Feb 201413 Nimrit Kang and Nitin Nayar, ‘The Evolution of Corporate Bankruptcy Law in India’ ICRA Bulletin Money&Finance OCT.03-MAR.04 available at <http://icra.in/Files/MoneyFinance/Oct2003March2004EvolutionofCorporate.pdf> accessed 23rd Feb 201414 Justice Eradi Committee Report, 2000 showed that 20 % of the total cases brought before the BIFR were dismissed due to evidence of manipulation of financial statement or other wrong doing by the management

just to obtain bank concessions.15 The laws did not allow the

creditors to initiate recovery proceedings and the unscrupulous

managerial personnel of companies took advantage of the situation

to suit their own interest.

The process of liquidation and winding up was time-

consuming and resulted in almost complete erosion of the asset

value of the company concerned.16 The BIFR too made its bias

towards referring companies for liquidation explicitly clear. The

system under SICA seemed to have a bias against restructuring.17

Over time BIFR itself proved to be a complete failure in

restructuring companies and the corporate debt restructuring

scheme introduced by the RBI which ensured that “companies could

sit across bankers and work out a restructuring scheme”18 gained

popularity. Figures reflect that BIFR has been able to save only

15.81% companies registered with it since its inception in 1987

till October 2010.19

15 Kang and Nayar, Supra note 1416 Mishra, Supra note 1317Kang and Nayar, Supra note 14. Of 1,711 active cases at end of 2002, 63 per cent were recommended for liquidation, 22 per cent were reorganised successfully, 15 per cent were still under rehabilitation.18 Mohan R. Lavi, ‘Corporate sickness defies cure’ BusinessLine (27 November, 2013)<http://www.thehindubusinessline.com/opinion/corporate-sickness-defies-cure/article5397934.ece?ref=relatedNewsaccessed >accessed 23rd February, 2014.19Ramnath Pradeep, ‘Needed: Better ‘hospitals’ to nurse sick units’ BusinessLine (22 July 2013)<http://www.thehindubusinessline.com/opinion/needed-better-hospitals-to-nurse-sick-units/article4941674.ece?ref=relatedNews > accessed 23rd Feb 2014. In stark contrast the CDR cell has resolved 76.82% cases referred to it.

2.2 MAJOR CHANGES BROUGHT ABOUT BY THE COMPANIES (SECOND

AMENDMENT) ACT, 2002:

Part VIA (Sections 424A-424L) titled Revival and

Rehabilitation of Sick Industrial Companies was incorporated in

the Companies Act, 1956 by the Companies (Second Amendment) Act,

2002 to plug the loopholes in SICA. The major changes brought

about by it may be summarized in the following table:

PROVISION

IN

QUESTION

SICA,

1985

COMPANIES(SECOND

AMENDMENT)ACT,

2002

OBSERVATIONS

Definition

of

sickness

Section 3(1)

(o) defines

sick

industrial

company as an

industrial

company (being

registered for not

less than 5 years)

which has at

the end of the

any financial

year accumulated

losses equal to or

exceeding its

entire net worth.

Section 2(46AA)

defines a sick

industrial company as

an industrial

company, which has at

the end of any

financial year:

● accumulated losses

exceeding 50% of average

net worth during 4 years;

or

● has failed to repay

debts to its creditor(s) in 3

consecutive quarters on

demand made for

repayment.

The definition of

industrial

sickness under

SICA was

considered

restrictive by

the J. Eradi

Committee

primarily because

the chances of a

company

recovering were

remote by the

time it had its

accumulated

losses equal to

or exceeding its

net worth. The

five year

registration

requirement

further narrowed

the scope for

companies falling

under the Act.20

Net worth Net worth

defined under

section 3(ga)

means the sum

total of paid-up

capital and free

reserves.

Net worth defined

under section 2(29A)

means sum total of

paid up capital &

free reserves less of

provisions and expenses

as may be prescribed.

Chances of a sick

company being

detected earlier

was increased

manifold by this

provision as the

net worth would

considerably be

reduced under

such

circumstances.21

Reference BIFR inquires

to determine

sickness if:

(i) Board of

directors of a

Section 424A is

similar to section 15

of SICA. The difference

is that it enjoins on

the Board of

The certificate

from an auditor

from a panel of

auditors approved

by the NCLT added

20 Kang and Nayar, Supra note 1421 Mishra, Supra note 13

sick

industrial

company makes

a reference

within 60 days

from the date of

finalization of the

audited accounts

of the company

for the financial

year.22

(ii)On

reference from

the Central

Government,

the RBI or a

State

Government or

a public

financial

institution or

Directors of a sick

industrial company to

make reference to the

NCLT and prepare a

scheme of its revival

and rehabilitation to

be submitted to the

Tribunal. The

reference is to be

made within:

(i) 180 days from the

date on which the

Board of directors,

the Central

Government and other

institutions came to

know; or

(ii) 60 days of final

adoption of accounts

whichever is earlier.

The application along

authenticity to

the reference

made by the

Board.

The NCLT had been

empowered under

section 424A (5)

to pass an order

as to whether a

company is a sick

industrial

company on the

receipt of a

reference from

the Board and

such order would

be final. This

implied that the

reference could

be dismissed at

22 Section 15(1) SICA, 1985. The proviso to the said section states that such a reference may also be made prior to the finalization of duly audited accounts, if the Board of directors has sufficient reason to believe that the company has become a sick industrial company. Under such circumstances the reference shall be made within 60 days of the formulation of such opinion. Thesecond proviso further adds that no reference shall be made to the BIFR after the commencement of the SARFAESI, 2002 where financial assets have been acquired by any securitization or reconstruction company under section 5(1) ofthe Act.

a State level

institution or

a scheduled

bank;23

(iii)Upon its

own knowledge

as to the

financial

condition of

such company.24

with the reference of

the Board of

directors is to be

accompanied by a

certificate from an

auditor from a panel

of auditors prepared

by the Tribunal.25

this stage

itself.

23 Section 15(2) SICA, 1985. The proviso to the section states that such a reference shall not be made in respect of any industrial company by :- (i) theGovernment of any State, unless all or any of the industrial undertakings (belonging to such a company) were situated in that State; (ii) a public financial institution or a State level institution or a scheduled bank, unlessit had, by reason of any financial assistance or obligation rendered by it or undertaken by it, interest in such a company.24 Section 16 (1)(b) SICA, 1985.25 The certificate of the auditor shall indicate: (a) the reasons of the net worth of the company being 50% or less than 50%; or (ii) the default in repayment of its debt making such company a sick industrial company.

Inquiry

and

preparatio

n and

sanction

of scheme

for

revival or

rehabilita

tion

Under section

16 the

operating

agency26

inquires and

reports about

the sick

industrial

company within

60 days. On

the basis of

the report the

BIFR gives its

orders27 and

under section

18 operating

agency

prepares the

scheme for the

The operating agency

inquires and submits

its report within 21

days (which could be

extended to 40 days)28to the Tribunal

which passes its

final orders within

60 days (which could

be extended to 90

days). The operating

agency is required to

prepare the scheme

within 60 days having

regard to the

guidelines framed by the

RBI.29

The scheme sanctioned

by the NCLT is to be 26 As per section 3(1)(i) of SICA, 1985 Operating agency means a public financial institution, State level institution, scheduled bank or any other person as may be specified by general or special order as its agency by the Board.27 Under section 17 of SICA if the BIFR decides that it is practicable for thesick industrial company to make its net worth exceed its accumulated losses itshall provide reasonable to the company for the same. If the BIFR believes that it is not practicable for the company to o within a reasonable time it shall direct the operating agency to prepare a scheme in relation to such company having regard to the guidelines of the BIFR in the order.28 Section 424B of the Companies Act, 1956 as inserted by the Companies (Second Amendment) Act, 200229 Section 424D(1) of the Companies Act, 1956 as inserted by the Companies (Second Amendment) Act, 2002

Special

Director

Section 16(4A)

provides for

the

appointment of

a special

director or

directors for

safeguarding

of financial

or other

interests of

the company or

in public

interest. No

required

qualification

is mentioned.

To be appointed as a

special director, the

person concerned is

to possess knowledge,

experience and

expertise in

management or control

of the affairs of any

other company.32

The Amendment Act

of 2002 imposed

an obligation on

the special

directors which

was missing in

SICA. They had to

submit a report

to the NCLT

within 60 days of

their appointment

about the state

of affairs of the

company in

respect of which

reference had

been made.33

Winding up

of sick

industrial

Board under

section 20, is

required to

Under section 424G

the Tribunal is

itself empowered to

The one year

mandate further

necessitated that

30 Section 424D (9) of the Companies Act, 1956 as inserted by the Companies (Second Amendment) Act, 200231 Section 424D (11) of the Companies Act, 1956 as inserted by the Companies (Second Amendment) Act, 200232 Section 424B (5) of the Companies Act, 1956 as inserted by the Companies (Second Amendment) Act, 200233 Section 424B (6) of the Companies Act, 1956 as inserted by the Companies (Second Amendment) Act, 2002

company. forward its

opinion to the

concerned High

Court for the

winding up of

the sick

industrial

company if it

is of the

opinion that

it is unlikely

for it to make

its net worth

exceed the

accumulated

losses, within

a reasonable

time, while

meeting all

its financial

obligations

and that it is

unlikely to

become viable

in future.

order the winding up

of the sick

industrial company if

its chances of

revival are remote.

The NCLT can appoint

one of the officers of the

operating agency to act as

the official liquidator.

The NCLT can also

sell off the assets

of the sick

industrial company

and pass orders for

distribution in

accordance with the

provisions of section

529A of the Companies

Act, 1956.

Section 424G(4)

incorporates a

significant

improvement which

mandates that the

winding up procedure is to

be concluded within one

the winding up of

a sick industrial

company was to be

concluded within

a specific time

frame. Such a

time frame was

missing under

SICA.

year from the date of

the order of the

NCLT.Suspension

of legal

proceeding

s

Section 22

provides for

the

suspensions of

legal

proceedings,

contracts

etc.,34except

with the

consent of the

BIFR or AAIFR.

No parallel provision

is incorporated in

the Act. Recovery

proceedings and suits

against the sick

industrial company

can continue even if

enquiry is pending

with NCLT or revival

& rehabilitation

scheme is pending for

preparation

/implementation.35

This ensured that

the sick

industrial

companies no

longer enjoyed

immunity from

legal proceedings

or the like.

Section 22 was

considered to be

one of the most

contentious

provisions of

SICA. Overriding

effect.

Section 32

enjoins that

the provision

of SICA will

have

overriding

Overriding effect has

been done away with.

This implied that

the provisions of

different

statutes had to

be complied with

to make a scheme

34 Proceeding here relates to the proceeding for the winding up of the companyor for execution, distress or the like against any property and assets of the company or for the appointment of a receiver or any suit for the recovery of any money or for the enforcement of any security against the company.35 Mishra, Supra note 13

effect over

all other laws

except, FEMA

and

Urban Land

(Ceiling &

Regulation)

Act and also

the Memorandum

or Articles of

Association of

the company.

of revival or

rehabilitation

under the

Amendment Act

effective.

Penalty

for

offences.

Under section

33 the maximum

penalty that

can be imposed

is simple

imprisonment

for three

years and

fine.

Under section 424L of

the Amendment Act,

two new changes are

incorporated:

(i) the maximum fine

that can be levied is

set at Rs. 10 lakhs,

and

(ii) tampering with the

records of reference or

appeal filed under

the Act is recognized

as a punishable

offence.

The penalty

prescribed under

the Amendment Act

was comparatively

more stringent

thereby raising

the presumption

that its

provisions would

be complied with

more efficiently.

Rehabilita

tion and

Revival

Fund.

No such

provision.

Section 441C provides

for the establishment

of a Rehabilitation

and Revival Fund for

the purposes of

rehabilitation, revival or

protection of assets of a

sick unit. Moreover the

Central Government

has enjoined on

companies to pay by

way of cess at a rate

not more than 0.1 %

on the value of

annual turnover or

annual gross receipts

whichever is more

towards this fund.

This was a

progressive

change and amount

collected in the

Fund was at the

disposal of the

NCLT for the

purposes enlisted

in section 441D36.

36 As per section 441D, Companies (Second Amendment) Act, 2002 the Fund shall be applied by the Tribunal for the purpose of -(a) making interim payment of workmen's dues pending the revival or rehabilitation of the sick industrial company ; or(b) payment of workmen's dues due to the workmen, referred to in subsection (3) of section 529, of the sick industrial company ; or(c) protection of assets of sick industrial company ; or(d) revival or rehabilitation of sick industrial company ; which in the opinion of the Tribunal are necessary or expedient for the said purposes

CHAPT

ER III

COMPANIES ACT, 2013 AND KEY CHANGES IN THE REVIVAL AND

REHABILITAION OF SICK COMPANES

Modeled largely on the basis of the recommendations of

the Expert Committee on Company Law37 headed by Dr. J.J. Irani, ex-

Director of Tata Sons, the Companies Act 2013, provides for the

constitution of the NCLT and NCLAT (under Chapter XXVII) after

receiving the nod from the Supreme Court. The revival,

rehabilitation and the winding up of sick companies shall fall

within its ambit. Chapter XIX in the new Act spanning over 17

sections (Sections 253-269) titled “Revival and Rehabilitation of

Sick Companies” deals with a number of progressive changes to

ensure that the revival, rehabilitation and winding up of a sick

unit is accomplished within a specified time frame.38 One of the

most progressive changes that have been brought about by the new

Act is that, it applies to all sick companies and not just a sick industrial

company.37 J.J. Irani Expert Committee Report on Company Law,2005 <http://www.primedirectors.com/pdf/JJ%20Irani%20Report-MCA.pdf> accessed 23rd Feb 201438 The Expert Committee on Company Law noted that a survey by World Bank (Doing business in 2005 – India Regional Profile) had pointed out that it took10 years on an average to wind up / liquidate a company in India as compared to 1 to 6 years in other countries. See also Id.

3.1 KEY CHANGES INCORPORATED BY THE COMPANIES ACT, 2013:

Determination of sickness: The term sick company has not been defined

under the new Act. Section 253 states that where a company fails on

the demand by secured creditors representing 50% or more of the company’s

outstanding debt to pay the debt within 30 days or to secure or

compound it to their reasonable satisfaction any secured creditor may

file an application to the NCLT for determination that the company be

declared a sick industrial company.39 The Tribunal shall give its

decision within a period of 60 days, whether the company has

become sick or not. The new test for sickness is more pragmatic

because a positive net worth40 does not always imply that a

company would be able to repay its debts.41 There is greater

involvement of secured creditors and the necessity of a

certificate from an auditor has been done away with.

Stay on pending proceedings : There is no automatic stay on

proceedings42against the company for an indefinite period till39 Under section 253(5) the Central Government, or RBI or State Government or a public financial institution or a State level institution or a scheduled bank may also make a reference to the Tribunal if it has reason to believe that the company has become sick.40 Section 2(46AA) of the Companies Act, 1956 inserted by Companies (Second Amendment) Act,2002 defined an industrial company to be sick if at the end of any financial year it had accumulated losses 50% of average net worth during 4years.41 Lalit Kumar, ‘Will the Companies Bill treat ‘sick’ firms better?’ BusinessLine(12 August 2013)<http://www.thehindubusinessline.com/opinion/will-the-companies-bill-treat-sick-firms-better/article5015949.ece>accessed 25th Feb, 2014.42 Proceeding here relates to the proceeding for the winding up of the companyor for execution, distress or the like against any property and assets of the

the case is settled. Such a stay would be granted only on an

application of the secured creditor making the reference to the

NCLT under section 253(2) which would be operative only for 120 days.

Disposal of assets 43 : A company for which an application has been made

by a secured creditor for the determination of sickness, shall

have the liberty to enter into obligations or dispose of its

assets if so required in the normal course of business without

the prior approval of the Tribunal44 as stated in section 253(6).

The section also enjoins on the Board of directors not to take

any step likely to prejudice the interests of the creditors.

Application for revival or rehabilitation: Such an application shall be

made by any secured creditor or by the company once the NCLT determines

that the company has become sick within 60 days of such

company or for the appointment of a receiver or any suit for the recovery of any money or for the enforcement of any security against the company.43 Section 253(6), Companies Act 2013.44 Under SICA and the Companies(Second Amendment) Act, 2002 the company could not dispose of its assets during the inquiry, preparation or consideration of the scheme and the period relating to the winding up of the company except with the prior approval of the BIFR or the NCLT as the case may be.

determination.45 The application shall be accompanied by such

documents as laid down in section 254(2).46 47

Interim administrator: The new Act under section 256 provides for

the appointment of an interim administrator within 7 days from the

receipt of application for revival and rehabilitation by the

NCLT. The interim administrator has inter alia been entrusted with

the following tasks:

To convene a meeting of creditors within 45 days of his

appointment and within 60 days from such date, submit a

45 There was no requirement for an application under SICA. Only a reference would be made to the BIFR or it would make a suo motu inquiry. Under the Companies (Second Amendment) Act, 2002 such an application had to be made by the Board of directors accompanied by a certificate from the auditor.46 (a) audited financial statements of the company relating to the immediatelypreceding financial year;(b) such particulars and documents, duly authenticated in such manner, along with such fees as may be prescribed; and(c) a draft scheme of revival and rehabilitation of the company in such manneras may be prescribed.If the sick company does not have a draft scheme of revival and rehabilitationto offer, it shall file a declaration to that effect along with the application.47 The provisos to section 254 makes it amply clear that such a provision willnot apply if the creditors have sought to recover their dues under section 13(4) of the SARFAESI Act or where the financial assets of the sick company has been acquired by any securitization or reconstruction company under section 5(1) of the SARFAESI ACT, 2002

report to the NCLT, indicating whether it would be possible

to revive and rehabilitate the company.

To take over the management of the company where no draft

scheme has been filed by the company.

To appoint a committee of creditors consisting not more than 7

members and as far as possible representing all classes of

creditors and holding meetings of the committee of creditors

etc.48

Company Administrator: If the NCLT after considering the report of

the interim administrator is satisfied that the creditors

representing ¾ of the debt outstanding against the sick company present

and voting have resolved that the sick company may be revived and

rehabilitated, the Tribunal shall appoint a company

administrator49 for the company to prepare a scheme of revival

and rehabilitation.50 The appointment of an operating agency has been

done away with. An interesting provision which has been included

in the new Act is that the scheme prepared by the company

administrator may include the takeover of a sick company by an

insolvent company.51

48 Section 257 Companies Act, 201349 Section 259 (1) Companies Act, 2013: The interim administrator or the company administrator, as the case may be, shall be appointed by the Tribunal from a databank maintained by the Central Government or any institute or agency authorised by the Central Government in a manner as may be prescribed consisting of the names of company secretaries, chartered accountants, cost accountants and such other professionals as may, by notification, be specifiedby the Central Government. The interim administrator may also be appointed as the company administrator if the NCLT deems fit.50 Section 258(b) Companies Act, 201351 Section 261(2)(d) Companies Act, 2013

Enhanced power to creditors: The new Act besides providing enhanced

protection to creditors has increased the role played by them in

the revival and rehabilitation of sick units. Besides initiating

the process of revival and rehabilitation by making an

application to the NCLT, the creditors52 both secured and unsecured

have to approve the scheme prepared by the company administrator

within 60 days but not later than 120 days from the date of

appointment of the administrator, before the same can be placed

before the Tribunal for its sanction.53 Once approved by the

Tribunal the scheme has binding effect from the date of its

operation on all concerned.54

Winding up: The creditors have been given the power to decide when

a company should be wound up. The right to exercise such power

arises in two circumstances. Firstly, after perusing the report of

the interim administrator if creditors representing three-fourth in the

value of the amount outstanding against the company resolve that it is

not possible to revive and rehabilitate the company, the NCLT shall order

that proceedings for winding up be initiated.55 Secondly, if the

scheme prepared by the company administrator is not approved by the

unsecured creditors representing one-fourth in value of the amount owed by the

52 Vide section 262(2) the company administrator shall convene separate meetings of secured and unsecured creditors of the sick company and if the scheme is approved by the unsecured creditors representing 1/4 in value of theamount owed by the company to them and the secured creditors, representing ¾ in value of the amount outstanding against financial assistance disbursed by them to the sick company, the company administrator shall submit the scheme before the Tribunal for sanctioning the scheme.53 Section 262 Companies Act, 201354 Section 263 Companies Act, 201355 Section 258(b) Companies Act, 2013

company to them and the secured creditors, representing three-fourth in

value of the amount outstanding against financial assistance provided by them

to the sick company, the company administrator shall submit a

report to the Tribunal within 15 days and the Tribunal shall wind

up of the sick company in accordance with the provisions of

Chapter XX of the new Act.56

Enhanced penalty: Under the Companies (Second Amendment) Act, 2002

the offences committed in relation to chapter VIA attracted

punishment of simple imprisonment for a maximum term of 3 years

and fine up to a maximum of 10 lakh rupees. Under the new Act the

maximum term of imprisonment has been further enhanced to 7 years.57This should have a deterrent effect on persons violating the

provisions.

Rehabilitation and Insolvency Fund58: Modeled on the lines of the

Rehabilitation and Revival Fund in the Companies (Second

Amendment) Act, 2002, the new Act provides for a Rehabilitation

and Insolvency Fund for the purpose of rehabilitation, revival

and liquidation of sick companies.59 60The Central Government had

56 Section 265 Companies Act, 201357 Section 267 Companies Act, 201358 Section 269 Companies Act, 201359 As per section 269(2) Companies Act, 2013 the following shall be credited to the Fund—(a) the grants made by the Central Government for the purposes of the Fund;(b) the amount deposited by the companies as contribution to the Fund;(c) the amount given to the Fund from any other source; and(d) the income from investment of the amount in the Fund.60 An administrator shall be appointed by the Central Government for the management of the Fund as provided under section 269(4). If winding up proceedings are initiated against any company under part XX, such company may make an application to the NCLT to withdraw funds not exceeding the amount

the power to require companies to pay a cess at a rate not

exceeding 0.1% on the value of annual turnover or annual gross

receipts whichever was more towards the Rehabilitation and

Revival Fund. This requirement has been done away with and hence

it is doubtful how many companies would now contribute towards

this fund voluntarily.

contributed by it, for making payments to workmen, protecting the assets of the company or meeting the incidental costs during proceedings.

CHAPTER IV

CONCLUSION

The legal provisions pertaining to sick industrial

companies have come a long way. From an insolvency regime that

was riddled with endless loops of delays to the present Companies

Act, 2013 which comes with the promise of time bound treatment of

sick companies and not just sick industrial companies looking for

revival, rehabilitation or winding up, significant progress has

been made as far as the legal provisions are concerned. The

Companies (Second Amendment) Act, 2002 brought with it several

progressive changes including a time bound restructuring or

liquidation process. But unfortunately it did not see the light

of the day. Chapter XIX of the Companies Act, 2013 seeks to

consolidate the provisions relating to sick companies. The NCLT

has been entrusted with the task of the BIFR and that of the High

Courts in matters relating to winding-up, amalgamation or

restructuring. This should facilitate the early disposal of cases

as multiplicity of proceedings before several authorities and

institutions has been done away with.

The new Act has sought to strengthen and secure the

precarious position of creditors of sick companies. Under the

previous regime, creditors apart from the scheduled banks and

public financial institutions had no say in the entire process.

The new Act has not only given them a voice but has also ensured

that they play a significant role in the revival, rehabilitation

and consequent liquidation of the company. However the Act has

given the right to approach the NCLT only to the secured

creditors and not to the unsecured creditors. The unsecured

creditors have a limited role to play. The automatic stay on

proceedings which had been a bone of contention under SICA has

been done away with. Stay if granted shall not be longer than a

period of 120 days and this shall ensure that only genuine cases

are reported to the NCLT.

The revival, rehabilitation and liquidation of the company

has been sought to be completed within a specific time frame but

it is doubtful whether the stipulated timelines are mandatory or

merely directory. Chapter XIX of the new Act has not been

notified in the Gazette of India and has therefore not been

brought into effect yet. Despite the progressive and pragmatic

changes that have been incorporated, the new Act is yet to pass

the tests of time. Only time will tell whether the changes that

have been incorporated can or will change the scenario for the

sick companies.

BIBL

IOGRAPHY

A. PRIMARY SOURCES:

Bare text of the Sick Industrial Companies Act, 1985

Bare text of the Sick Industrial Companies (Special

Provisions) Repeal Act, 2003

Bare text of the Companies (Second Amendment) Act, 2002

Bare text of the Companies Act, 2013

CASE:

Thiru R. Gandhi, President, Madras Bar Association v. Union of India (2004)

120 Com Cases 210 (Mad)

B. SECONDARY SOURCES:

ARTICLES:

Avimukt Dar, ‘National Company Law Tribunal under the new Companies

Act, 2013’

Purnima Mishra, ‘The provisions of SICA and Companies Act’

Nimrit Kang and Nitin Nayar, ‘The Evolution of Corporate Bankruptcy

Law in India’ ICRA Bulletin Money&FinanceOct.03-Mar.04

REPORTS:

Report of the Advisory Group on Bankruptcy Law, 2001

J.J. Irani Expert Committee Report on Company Law, 2005

THESIS:

Asha Rani, ‘Alleviation of industrial sickness: a critical study’

NEWSPAPER ARTICLES:

Mohan R. Lavi, ‘Corporate sickness defies cure’ BusinessLine(27 November, 2013)

Ramnath Pradeep, ‘Needed: Better ‘hospitals’ to nurse sickunits’ BusinessLine (22 July 2013)

Lalit Kumar, ‘Will the Companies Bill treat ‘sick’ firmsbetter?’ BusinessLine (12 August 2013)

WEB REFERENCES:

http://www.caclubindia.com

http://www.primedirectors.com

http://rbidocs.rbi.org

http://www.thehindubusinessline.com

http://www.assocham.org

http://legalpundits.com

http://www.icaiejournal.org

http://icra.in