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
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