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REVIVAL AND RESTRUCTURING OF SICK COMPANIES: AN INDIAN LEGAL ANALYSIS

Author: Simran Kaplish, V year of B.Com.,LL.B.(Hons.) from Institute of Law, Nirma university

Co-author: Pratibha Dixit, V year of B.Com.,LL.B.(Hons.) from Institute of Law, Nirma university


Introduction

In India, industrial sickness is described as an industrial company that has been in operation for at least five years incurred losses equal to or exceeding its entire net worth at the end of any fiscal year as well as has suffered cash losses in such fiscal year and the fiscal year immediately preceding such financial year. According to the Companies (Second Amendment) Act, 2002, a sick Industrial Company has i) Accumulated losses in any financial year equal to 50 per cent or more of its average net worth during four years immediately preceding that financial year or ii) failed to repay its debts within any three consecutive quarters on demand made in writing for its repayment by a creditor. Furthermore, according to section 3(1)(o) of Sick industrial companies (special provisions) amendment act 1993[1] – “An industrial company (being a company licensed for not less than 5 years) which has accrued losses equal to or exceeding its entire net worth at the end of any financial year.”SICA’s primary goal is to determine sickness and expedite the regeneration of potentially viable units or the closure of unviable units. The act was also enacted to ensure the timely detection of sick and potentially sick companies owning industrial undertakings as well as the prompt determination by a body of experts of the preventive, ameliorative, remedial and other measures that must be taken with caution.


Furthermore, section 253 of the companies act, 2013[2]specifies the determination of the sickness of a company. It states that any secured creditor of a company representing 50% or more of the outstanding amount of debt whether the company has failed to pay the debt within thirty days of the service of the notice of claim or to obtain or compound it to the proper satisfaction of the creditors. The secured creditor must then apply with the tribunal in a specified manner including references to all such facts for such default, non-payment, etc. After receiving the complaint from the secured creditor, the tribunal shall decide within sixty days on the merits of the application determining if a company has become sick or not. Once the tribunal determines that a company has become sick and is in a position to repay its debts, within a reasonable period, it shall order the company to repay its debts. Following satisfaction, the tribunal shall grant the company a fair period to settle its debts. In this paper, we shall be looking forward to the objectives and applicability of SICA, certain procedural aspects under SICA and judicial pronouncements regarding it, revival and rehabilitation of sick companies under companies’ bill, 2012.


Objectives of SICA

The Sick Industrial Companies (Special Provisions) Act of 1985 was enacted to make special provisions for the timely identification of sick companies that own industrial undertakings. The SICA formed the board for industrial and financial reconstruction (BIFR) to assess the sickness of such industrial firms and to recommend steps for either the revival of potentially viable units or the closure of unviable companies.


The declaration of objects and reasons for enacting the sick industrial companies (special provisions) act, 1985 notes that it would be necessary to revive and rehabilitate potentially viable sick industries to fully exploit productive industrial assets which provide maximum job satisfaction and maximize the use of back and financial institution funds.


In Namit R Kamani v. R.R. Kamani (1988), the Supreme Court held that the purpose of SICA as

  1. Ensuring full job protection

  2. Allowing the best use of funds and available production assets

  3. Realizing amounts owed to banks, organizations and creditors

  4. Providing efficient authority comprised of experts.


Applicability of SICA

The act applies to the entire country of India. Its provisions extend to all industrial companies operating in the industries mentioned in the first schedule to the Industries (Development and Regulation) Act of 1951. The first schedule covers all the industries except the shipping industry. It also applies to government as well as private undertakings.

Further, the Act does not apply to:

  • Cooperative societies and units owned by a trust

  • Shipping industries and other vessels drew by the power

  • Small scale industries have an investment of 1 crore in plant and machinery. It may be by ownership, lease or hire purchase.


Procedural aspects under SICA

If an industrial company becomes sick, the board of directors of the company must make a reference to the board (BIFR) for determination of steps to be taken concerning the board of determination of steps to be taken concerning the company within 6o days from the date of finalization of the company’s properly audited accounts for the fiscal year at the end of which the company has become sick. If the board of directors has ample cause even before such finalization to shape the opinion that the company had become a sick unit, the board of directors shall within 60 days of such formation refer to the board for determination of measures to be implemented about the company. Similarly, the board has the right to inquire into the activities of companies that have made reference or otherwise have been told to that effect. And, after such an investigation, the board is allowed to issue an order based on whether the company’s net worth exceeds its total losses within a reasonable time frame. If the board is confident that the sick industrial company can make its net worth surpass the accumulated losses within a reasonable period, it can order such a company to do so. If such a company is found to be incapable of generating such net worth, the board may order the operating agency to prepare a scheme to provide measures for such a company.


Bharati Shipyard Ltd has informed the BSE that the company’s net worth as of March 31, 2015, as per the audited accounts submitted before the board has been completely eroded and hence the company has become a sick industrial company under section 3(1)(o) of the act. As a result, the company had sent a reference to the BIFR u/s 15 of SICA.


Furthermore, there are salient features of section 16 which talk about the inquiry into the working of the sick industrial companies. These are:

  • BIFR may conduct whatever investigation it considers necessary to determine whether the industrial company has become a sick industrial company upon receipt of a reference concerning such company u/s 15 or upon information obtained concerning such company or upon its knowledge of the company’s financial condition.

  • By order, BIFR may require any operating agency to investigate the report and complete its investigation as soon as possible.

  • An effort should be made to complete the investigation within 60 days of its inception.

  • According to the clarification given under this provision, an investigation is deemed to have started upon receipt by BIFR of any reference or information or upon BIFR’s knowledge reduced to writing.

  • If BIFR finds it appropriate to conduct or trigger an investigation into any industrial enterprise, it has the authority to designate one or persons to serve as a special director or special director of the company.

  • BIFR may issue necessary directions to special directors for the proper discharge of duties.

  • The appointment of a special director referred to in subsection (4) is lawful and accurate, notwithstanding anything to the contrary contained in companies act, 1956 or any other law in force at the time or in the memorandum and articles of association or any other instrument relating to the industrial enterprise.

  • Any provision in any of the above laws or instruments aforesaid relating to share qualification, age limit, number of directorships, and removal from office of directors and similar conditions shall not extend to any special director appointed by BIFR.

  • The special director may serve only at the discretion of BIFR. He bears no duty or liability simply because he is a director or for something performed or omitted to be done in good faith in the discharge of his duties as a director or for anything related thereto. He is not subject to retirement by rotation and is not included in determining the number of directors subject to such retirement. He is not subject to liability under any statute for anything done or not done in good faith while conducting his duties for the sick industrial companies.


Revival and Rehabilitation of sick companies under the companies act

Section 254 of the companies act discusses applications for the revival and rehabilitation of the sick companies and section 253 discusses an application submitted to the tribunal to take necessary measures for the revival and rehabilitation which must be followed by:

  • Audited financial statements of the firm

  • Particulars and records properly authenticated in a specified manner

  • Draft scheme for revival and rehabilitation of the company

In the case of Pazaniappa Chettiar v. South Indian Planting and Industrial Co Ltd (1953), it was held that even if the company is declared sick by the tribunal, its rights and duties would remain unchanged. As if there had been no disturbance in the company’s activities.


The definition of industrial company/enterprise and the net worth criteria have been repealed by the company act of 2013. Sickness has been related to cash flows and these laws safeguard the interests of majority secured creditors. If a company fails to pay its debt within 30 days of receiving notice, it may apply with the tribunal for company determination. If the tribunal determines that a company has become sick, it must decide as soon as possible, by written order, whether it is feasible for the company to repay its debts within a reasonable period. Following the tribunal’s decision of sickness, the claimant must apply steps to be taken for revival and rehabilitation within 60 days of the determination. If the tribunal decides that the company is sick and there is no draft scheme for its revival and rehabilitation, the tribunal will guide the interim administrator whole will be appointed by the tribunal from a panel maintained by the central government. When the interim administrator submits his report on the prospect of revival, a company administrator is appointed who oversees the approval process by creditors and submits to the tribunal which will approve the scheme within 60 days of its approval by the creditors.


Conclusion

Industrial sickness is an issue that all societies, whether large or small, must have to face. What matters is that a proper legislative and institutional framework is established to deal with the situation. Although a framework to protect workers’ interests should be in place, a suitable exit strategy for non-viable units should be an integral part of the new approach. A strict mechanism should also be established so that the company’s directors cannot commit fraud on the unit to get under the purview of sickness. NCLT should also be made operational to ensure the expeditious disposition of cases in light of the sluggishness in which cases are handled by BIFR. Furthermore, the companies act provides detailed provisions for the revival and rehabilitation of sick companies and the tribunal is empowered to take all appropriate steps for the revival and rehabilitation of sick companies.


[1] Section 3(1) (O) of Sick industrial companies (special provision) amendment Act, 1993

[2] Section 253 of Companies Act, 2013