RECOVERY OF DEBTS AND ENFORCEMENT OF SECURITY –MISUSE OF SEC 22 OF THE SICA – A CRITICAL ANALYSIS.
Practising Company Secretary
I. BACK GROUND
The incidence and magnitude of ill effects of sickness and the resultant closure of industrial companies such as loss of production, loss of employment, loss of revenue to the central and state Government and locking up of investible funds of banks and financial institutions, was a matter of serious concern to the Government. It was recognized that in order to fully utilize the productive industrial assets, to afford maximum protection of employment and optimize the use of the funds of banks and financial institutions, it would be imperative to revive and rehabilitate the potentially viable sick industrial companies as quickly as possible. However, the multiplicity and complexity of laws and agencies present made the adoption of a co-ordinated approach in dealing with sick industrial companies, difficult.
It was realized that the measures, till then adopted by the government, viz. nationalization or takeover of management, had not been able to achieve the desired results. Both these measures needed periodic and constant financial and other support. In spite of all the possible investment and support, many sick industrial undertakings did not show any symptoms of viability. A large number of undertakings did not become healthy in spite of their management being continued with the Government or a Government nominated agency for several years as huge sums of money were required to meet their past liabilities of unpaid wages, taxes, duties etc., and for working capital. Hence, even the sick industrial undertakings whose management were taken over were forced to be wound up.
Therefore timely and advance measures should be taken either by legislation or by administrative orders and machinery, to keep a strict vigil on the symptoms of corporate sickness with particular reference to such companies as are prone to any kind of corporate sickness, so that preventive and remedial measures can be taken before a company goes sick. A need was therefore felt, to enact in public interest, a legislation to provide for timely detection of sickness in industrial companies and for expeditious determination by a body of experts of the preventive, ameliorative, remedial and other measures that would need to be adopted with respect to such companies and for enforcement of the measures considered appropriate. Based on the recommendation of a Committee of Experts under the Chairmanship of Shri T.Tiwari, the Government enacted a special legislation named as the Sick Industrial Companies (Special Provisions) Act, 1985 commonly known as SICA. The Board of Industrial and Financial Reconstruction (BIFR) and the Appellate Authority for Industrial and Financial Reconstruction (AAIFR) were also established in 1987 to look after the matters covered under the purview of SICA. SICA was further amended in 1991 to bring government companies under its purview and again in 1993 certain changes were brought out in the act for the determination of industrial sickness.
The legislation was predominantly remedial and ameliorative, in so far as it empowered the quasi judicial body, the BIFR to take appropriate measures for revival and rehabilitation of potentially viable sick companies and for liquidation of non-viable companies and was regulatory only to a certain extent. The latter aspect was reflected in the provisions of the Act providing for obligation of sick industrial companies and potentially sick industrial companies, to make reference to the Board and treating any non-compliance as a punishable offence.
II. Sick Industrial Companies (Special Provisions) Act, 1985
1. Preamble of the Act
The sick Industrial Companies (Special Provisions) Act, 1985 (SICA) is an act which makes in public interest, special provisions, with a view to securing timely detection of sick and potentially sick companies owning industrial undertaking, speedy determination by a Board of experts of the preventive, ameliorative, remedial and other measures which need to be taken with respect to such companies and expeditious enforcement of measures so determined and for matters connected therewith or incidental thereto.
2. Principal objectives
The principal objectives of SICA are:
a) To evaluate the techno-economic viability of sick industrial companies with a view either to rehabilitate them, if the public interest so demanded and their rehabilitation was possible, or to close them down, if continuing them would be impossible.
b) To stop continued drain of public and private resources for the overall economy of the country.
c) To protect employment as far as practicable.
3. Relevancy of date of Incorporation for determination of sickness
According to the Act, the sickness of a company was related to the age of the company, i.e., date of its registration as per the certificate of incorporation issued by the Registrar of Companies and not the date on which the company was granted the certificate of commencement of business. Also, the date of actual commencement of its activities, i.e., commercial production or rendering services in which the company was engaged was not considered relevant.
4. Criteria for determination of sickness
As per Sec 3[(o) sick industrial company means an industrial company (being a company registered for not less than five years) which has at the end of any financial year accumulated losses equal to or exceeding its entire net worth
[Explanation: For the removal of doubts, it is hereby declared that an industrial company existing immediately before the commencement of the Sick Industrial Companies (Special Provisions) Amendment Act, 1993, registered for not less than five years and having at the end of any financial year accumulated losses equal to or exceeding its entire net worth, shall be deemed to be a sick industrial company;]
As per Sec 2[(ga) net worth means the sum total of the paid-up capital and free reserves.
Explanation: For the purposes of this clause, free reserves means all reserves credited out of the profits and share premium account but does not include reserves credited out of re-evaluation of assets, write-back of depreciation provisions and amalgamation;]
Explanation: For the purposes of this clause, free reserves means all reserves credited out of the profits and share premium account but does not include reserves credited out of re-evaluation of assets, write-back of depreciation provisions and amalgamation;]
SICA applies to companies both in public and private sectors owning industrial undertakings:-
(a) pertaining to industries specified in the First Schedule to the Industries (Development and Regulation) Act, 1951, (IDR Act) except the industries relating to ships and other vessels drawn by power and;
(b) not being "small scale industrial undertakings or ancillary industrial undertakings" as defined in Section 3(j) of the IDR Act.
The criteria to determine sickness in an industrial company are
(i) the accumulated losses of the company to be equal to or more than its net worth i.e. its paid up capital plus its free reserves
(ii) the company should have completed five years after incorporation under the Companies Act, 1956
(iii) it should have 50 or more workers on any day of the 12 months preceding the end of the financial year with reference to which sickness is claimed.
(iv) it should have a factory license.
As per Companies (Auditor’s Report) Order, 2003 ["CARO"] read with Sec 227 of Companies Act, 1956, it is incumbent on the part of the statutory auditors to comment “Whether in case of a company which has been registered for a period not less than five years, its accumulated losses at the end of the financial year are not less than fifty per cent of its net worth and whether it has incurred cash losses in such financial year and in the financial year immediately preceding such financial year also”.
The objective appears to be to identify and report ‘potentially sick companies.
5. Reference to the Board (Sec 15)
Under section 15 of the Act, where an industrial company has become sick, the Board of Directors of the company shall, within 60 days from the date of finalization of duly audited accounts of the company for the financial year at the end of which the company has become sick, make a reference to the Board (BIFR) for determination of measures to be adopted with respect to the company.
Even if the Board of Directors had sufficient reason even before such finalization to form opinion that the company had become a sick unit after the Board of Directors had sufficient reason even before such finalization to form opinion that the company had become a sick unit after the Board of Directors shall, within 60 days after it has formed such opinion, make reference to the Board for determination of measures which shall be adopted in respect of the company.
Further, the Central Government or Reserve Bank or State Government or Public Financial Institution or a State level institution or Schedule bank may provide sufficient reason that any industrial company has become sick industrial company, may make a reference to the Board for determination of measures which shall be adopted in respect of the company. However, the State Government can make a reference in respect of any industrial undertaking which are situated in such state only. Similarly, public financial institution or a State level institution or a scheduled Bank can make a reference only if it has provided any financial assistance or some obligation rendered by it or undertaking by it in respect of the referred company.
6. Inquiry into working of the company and making suitable order by BIFR
A. Inquiry into Working of Sick Industrial Companies – Section 16
The salient features of the inquiry are as follows:
i) BIFR, upon receipt of a reference with respect to such company under Section 15; or upon information received with respect to such company or upon its own knowledge as to the financial condition of the company, may make such inquiry as it may deem fit for determining whether the industrial company has become a sick industrial company.
ii) BIFR may require, by order, any operating agency to enquire into and make a report and complete its inquiry as expeditiously as possible.
iii) Endeavour should be made to complete the inquiry with sixty days from the commencement of the inquiry.
iv) As per the explanation given under this section, an inquiry shall be deemed to have commenced upon the receipt by BIFR of any reference or information or upon its own knowledge reduced to writing by BIFR.
v) BIFR has powers to appoint one or more persons to be a special director or special directors of the company if it deems it necessary to make an inquiry or to cause an inquiry as mentioned above to be made into any industrial company.
vi) BIFR may issue necessary directions to special directors for proper discharge of duties.
vii) The appointment of a special director referred to in Sub-section (4) shall be valid and effective notwithstanding anything to the contrary contained in the Companies Act, 1956, or in any other law for the time being in force or in the memorandum and articles of association or any other instrument relating to the industrial company.
viii) Any provision regarding share qualification, age limit, number of directorships, removal from office of directors and such like conditions contained in any such law or instrument aforesaid, shall not apply to any special director appointed by BIFR.
ix) The special director will hold office only during the pleasure of BIFR. He does not incur any obligation or liability by reason only of his being a director or for anything done or omitted to be done in good faith in the discharge of his duties as a director or anything in relation thereto. He is not liable to retirement by rotation and shall not be taken into account for computing the number of directors liable to such retirement. He is not liable to be prosecuted under any law for anything done or omitted to be done in good faith in the discharge of his duties in relation to the sick industrial company.
B. Powers of Board to make suitable order on the completion of inquiry –Sec 17
If, after making an inquiry under section 16, the Board is satisfied that a company has become a sick industrial company, the Board shall, after considering all the relevant facts and circumstances of the case, decides, whether it is practicable for the company to make its net worth exceed the accumulated losses within a reasonable time.
If the Board decides that it is practicable for a sick industrial company to make its net worth exceed the accumulated losses within a reasonable time, the Board, shall, by order in writing, give time to the company to make its net worth exceed the accumulated losses. What is reasonable time depends on the facts and circumstances of each case. A period of 7 to 10 years, within which the company should be able to wipe off its accumulated losses is normally regarded by the Board as a reasonable time. This is also the time within which under a sanctioned scheme of the Board, the sick industrial company can be expected to have been revived or rehabilitated.
If the Board decides under Sub-section (1) that it is not practicable for a sick industrial company to make its net worth exceed the accumulated losses within a reasonable time by order in writing, directs any operating agency specified in the order to prepare, a scheme for revival/rehabilitation of sick industrial company. The operating agency would normally be a public financial institution notified as such by the Board through a general or special order.
7. Preparation and Sanction of revival Scheme (Sec 18)
If the Board appoints an operating agency under Section 17(3) of the Act, then the operating agency is required to prepare and submit a schedule in respect of the referred company by providing any or more of the following measures:
(i) The financial reconstruction of the sick industrial company:
(ii) The proper management of the sick industrial company by change in, or takeover of, the management of the sick industrial company.
(iii) The amalgamation of---
(a) The sick industrial company with any other company, or
(b) Any other company with the sick industrial company.
The Board may finalise the scheme after considering the views and suggestions of the company, the operating agency and the public by publishing the draft scheme in the newspaper and thereafter formally sanction the same which is referred to as the “sanctioned scheme”.
8. Winding up of Sick Company – (Sec 20)
The salient features of Section 20 of SICA are as follows:
i) After making necessary inquiry under Section 16 and after giving an opportunity to all concerned parties, if BIFR is of the opinion that the sick industrial company is not likely to make its net worth exceed the accumulated losses within a reasonable time and it is not likely to become viable in future and as such it is just and equitable to wind up the company, BIFR my record and forward its opinion to the concerned High Court.
ii) The High Court shall, on the basis of the opinion of the Board, order winding up of the sick industrial company and may proceed and cause to proceed with the winding up of the sick industrial company in accordance with the provisions of the Companies Act, 1956.
iii) For the purpose of winding up, the High Court may, with the consent of the operating agency, appoint any officer of the operating agency, as the liquidator and such officer, if appointed shall be deemed to be, and have all the powers of, the official liquidator under the Companies Act, 1956.
iv) When BIFR recommends the winding up of a sick industrial company pursuant to Section 20(1) of the SICA, 1985 and forwards its opinion to the connected High Court, the High Court is bound to order the winding up of the company on the basis of the opinion of BIFR.
v) Once BIFR forwards its opinion to the connected High Court, the role of BIFR comes to an end in respect of the said sick industrial company.
vi) As per Sub-section (4) of Section 20, the BIFR has the power to direct the sale of assets of the sick industrial company in such manner as it may deem fit. The power of BIFR under sub-section is exercisable notwithstanding anything contained in Sub-section (2) or (3) of Section 20. Interestingly, the Supreme Court in V R Ramaraju v. Union of India & others  in relation to Section 20(2) of SICA held that the High Court in deciding the question of winding up of the company has to take into account the opinion of BIFR forwarded to it and is not to abdicate its own function of determining the question of winding up.
vii) Adding clarity to the end of jurisdiction of BIFR and beginning of jurisdiction of High Court, the Division bench of the Karnataka High Court in BPL Limited, Bangalore v. Inter Modal Transport Technology Systems (Karnataka) Limited, Bangalore (in liquidation) & others held that the scheme of SICA as contained in Sections 22, 22A, 20 and 32 of that makes it clear that from the date of commencement of an inquiry in regard to any reference received under Section 15, till passing of an order of winding up by the High Court under Section 20(2) of SICA, BIFR retains absolute control over the affairs of the company and can either prevent any sale or permit any sale and the sick industrial company is entirely governed by the provisions of SICA. On the other hand, hand, once an order of winding up is made by the High Court under Section 20(2) of SICA, acting on the opinion of BIFR under Section 20(1), the control and jurisdiction over the company, its affairs and assets passes over to the High Court and BIFR, ceases to have any power to pass any orders or give any directions.” The division bench further held that the company court does not sit in appeal over the orders of BIFR nor exercise power under Articles 226 and 227 of the Constitution. The apex court held that the sale of assets of a company by a secured creditor as per directions of BIFR, prior to the date of winding up order, is not void for want of leave of the court and there is no question of obtaining any leave or permission of this court.
9. Immunity from certain Litigations – (Sec 22)
One of the most important provisions of SICA is section 22. In certain circumstances, no proceedings for the winding up of the industrial company or for execution, distress or the like against any of the properties of the industrial company or for the appointment of a receiver in respect thereof and no suit for the recovery money or the enforcement of any security against the industrial company or of any guarantee in respect of any loans or advance granted to the industrial company shall lie or be proceeded with further, except with the consent of BIFR or, as the case may be, AAIFR (the Appellate Authority). The protection under Section 22 of SICA is a superior protection as it operates notwithstanding anything contained in the Companies Act, 1956, or any other law or the memorandum and articles of association of the industrial company or any other instrument having effect under the said Act or other law.
The above protection is available in respect of an industrial company when an inquiry under Section 16 is pending in relation to the said industrial company or when any scheme referred to under Section 17 is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal under Section 25 relating to an industrial company is pending. Where the management of the sick industrial company is taken over or changed in pursuance of any scheme sanctioned under Section 18, notwithstanding anything contained in the Companies Act, 1956, or any other law or in the memorandum and articles of association of such company or any instrument having effect under the said Act or other law – (a) it shall not be lawful for the shareholders of such company or any other person to nominate or appoint any person to be a director of the company; (b) no resolution passed at any meeting of the shareholders of such company shall be given effect to unless approved by BIFR.
BIFR may by order declare with respect to the sick industrial company concerned that the operation of all or any of the contracts, assurances of property, agreements, settlements, awards, standing orders or other instruments in force, applicable to the sick industrial company in question shall remain suspended or that all or any of rights, privileges, obligations, and liabilities accruing or arising there under before the said date, shall remain suspended or shall be enforceable with such adaptations and in such manner as may be specified by BIFR provided that such declaration shall not be made for a period exceeding two years which may be extended by one year at a time so, however, that the total period shall not exceed seven years in the aggregate. Any such declaration is valid and is protected notwithstanding anything contained in the companies Act, 1956, or any other law or agreement or instrument or any decree or order of a court, Tribunal, officer or other authority or of any submission, settlement or standing order.
Accordingly, any remedy for the enforcement of any right, privilege, obligation and liability suspended or modified by such declaration, and all proceedings relating thereto pending before any court, Tribunal, officer or other authority shall remain stayed or be continued subject to such declaration. On the declaration ceasing to have effect – (i) any right, privilege, obligation or liability so remaining suspended or modified, shall become revived and enforceable as if the declaration had never been made; and (ii) any proceeding so remaining stayed shall be proceeded with, subject to the provisions of any law which may then be in force, from the stage which had been reached when the proceedings became stayed. Obviously from a perusal of the language contained in Section 22(1) of SICA, it is clear that Section 22 does not grant any immunity against criminal proceedings against the company or its directors.
In Maharashtra Tubes Ltd Vs State Industrial and Investment Corporation of Maharashtra Ltd the Supreme court held that the idea underling section 22(1) of SICA is that every such action (against the company or its guarantors for recovery of money or enforcement of security) should be frozen unless expressly permitted by the specified authority until the investigation for the revival of the industrial undertaking is finally determined.
In Patheja Bros. Forgings and stamping Vs ICICI Ltd the Supreme court held that the words section 22 are clear and unambiguous and that they provide that no suit for the enforcement of a guarantee in respective of any loan or advance granted to the concerned industrial company will lie or can be proceeded with without the consent of BIFR or the appellate authority. When the words of legislation are clear, the court must give effect to them as they stand and cannot demur on the ground that the legislature must have intended otherwise. The apex court clearly held that any suit for enforcement of the guarantee in respect of loans granted to a sick industrial company cannot be proceeded with unless consent as required under section 22 of SICA is obtained.
10. Ban against disposal of Assets (Sec.22A):
In the interest of the sick industrial company or creditors or shareholders or in the public interest, Section 22A of SICA empowers BIFR to order not to dispose off any assets of the company in the interest of creditors. Such order can be passed (a) during the period of preparation or consideration of the scheme under Section 18; and (b) during the period beginning with the recording of opinion by the board for winding up of the company under Sub-section (1) of Section 20 and up to commencement of the proceedings relating to the winding up before the concerned High Court.
11. Legislative changes contemplated during 2002 are yet to be implemented:
Eight full years period has elapsed since Part VIA of the Companies Act, 1956 was introduced by the Companies (Second Amendment) Act, 2002 contains provisions for revival and rehabilitation (R&R Scheme) of sick industrial companies. This Part of the Act contains 12 Sections, viz, Sections 424A to 424L. This Part appears to have been rightly placed immediately before Part VII of the Act that relates to winding up. Thus, if it is possible, there could be a time bound attempt for revival and rehabilitation. If the efforts for revival and rehabilitation fail, Part VII will take care. A peep into the provisions of the Act would reveal that there is no trace of Section 22 of SICA. The absence of a provision similar to Section 22 of SICA will go a long way as a progressive legislative step in preventing abuse of process of law. The Amendment Act has done away with a provision, which has more often been misused. The amendment which has provided time bound schedule in the new legislation will see the light of the day at least in near future.
12. Comparative analysis:
There are some major variation between the provisions under SICA and those incorporated in Companies Act, 1956. Some of them are:
i) According to Section 22(1) of SICA, when an inquiry was pending or scheme was under preparation or implementation or where an appeal with AAIFR was pending, legal proceedings were to be suspended thereby providing protection to sick industrial company against suit for recovery of money execution against property of company or winding up proceedings. However this protection is not available under companies Act. Hence, recovery proceedings and suits against such companies can continue even if the matter is pending with NCLT. Winding up proceedings however may be kept pending as they are with the same Tribunal.
ii) The provisions of SICA were overriding i.e. Prevailed over all other laws, expect FEMA and Urban land Ceiling Act. However, according to new provisions, if a scheme is approved by NCLT, formalities and procedures as required under Companies Act and other laws have to be completed.
iii) The company now has to prepare the scheme for revival of sick company, submit the same while making reference to Tribunal (NCLT) and the application should be accompanied with a certificate by auditor from approved panel.
iv) A cess is required to be paid by all companies which will be used towards ‘Rehabilitation and Revival Fund’ to be utilized for the benefit of sick industrial companies and be at the disposal of Tribunal.
v) Government companies can make a reference only if Central/State Government gives specific approval.
13. Status of enforcement of changes
As per companies (Second Amendment) Act, 2002 powers of BIFR (Board for industrial and financial Reconstruction) were to be exercised by NCLT (National Company Law Tribunal) to be constituted under section 10FB of companies Act, 1956 and appeal against order of NCLT could be referred to NCLAT (National Company Law Appellate Tribunal) to be constituted under section 10FR of companies Act, 1956. Hence it is to be noted that though amendments in Companies Act have been passed by Parliament, SICA has not yet been replaced and companies (Second Amendment) Act, 2002 has not been brought into force. Till SICA is repealed, the sick companies (including government companies) will continue to be under BIFR. Also, part Vl A, consisting of section 424A to 424L, inserted by the companies (Second Amendment) Act, 2002 has not yet been made effective.
As the Government is contemplating the establishment of NCLT to exercise jurisdiction hitherto-before being exercised by the Board for Industrial and Financial Reconstruction (BIFR) under the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985 (“SICA”), the importance of NCLT assumes greater significance. Now that the Supreme Court of India has upheld the constitutional validity as to the setting up of NCLT, the concerned ministry has to re-look the entire issue and then come out with its decision and only thereafter the Union of India can set in motion the setting up and manning of and functioning of the NCLT and its Appellate Tribunal.
14. Shortcomings in the present system
As per the criteria referred above, an Industrial undertaking can not approach the BIFR not before the completion of five years from the date of registration even though its Net worth has eroded due to accumulated losses. The practical effect of this condition was that even if a company had eroded its entire net worth, but the prescribed period of five years from registration had not been completed, the BIFR was precluded from taking cognizance of the sickness of company. There had been many instances when the BIFR had to refuse registration of companies on this ground. This was a matter of grave concern because in capital intensive industries where the incidence of depreciation was quite high in the initial years, it was quite possible for a company to completely erode its net worth in less than five years. This was the reason most of the cases referred to BIFR involved almost dead companies, which had either ceased to be operative long ago or were on the verge of closure. In such situations, the problem of rehabilitating such critically-sick industrial companies became all the more difficult. It was felt that a sick company should be able to seek registration with the BIFR as and when the sickness sets in irrespective of the fact that it has not completed the prescribed period of five years from its registration.
Both BIFR and AAIFR are functioning from their respective offices having their headquarters only at Delhi. It is becoming very difficult for the applicants to approach them from faraway places who are already been suffering from the burden of accumulated losses.
The benches of BIFR and AAIFR have manned mostly retired persons or the persons who are on the verge of retirement who may not be in a position to discharge their functions more effectively which in turn resulting piling up of the cases. Added to this majority of the benches vacant due to non filling of the vacancies because of a variety of reasons.
Because of the obvious reasons the mechanism is not working in the way that it should work as per the objectives / spirit of the Act, thereby in majority of the cases i) either there is a delay in diagnosing sickness in the right time ii) or there is a delay in taking effective measures when they are needed, in result we are failing to control / revive the sickness in the industry.
There is no proper monitoring mechanism to measure whether the relief and concessions granted under the scheme have been properly utilized and implemented to revive the industrial establishment from the sickness either during the pendency of the application before BIFR/AAIFR or thereafter.
Whenever any sick industrial undertaking approaches BIFR for grant of certain relief and concessions, there is a misconception in the public mind that the company will become sick and will not revive at all. The same misconception is also prevailing on Banks and Financial institutions and they are having their own reservations to take up for considering any banking facilities to be extended to these companies.
15. Need for implementation of expert committees recommendations
As per the study made by high level committee on Law relating to insolvency of Companies headed by Shri Justice V. Balakrishna Eradi, the average time taken to wind up company in India based on the existing procedure and practices, is almost 25 years. This itself speaks volumes about the draw backs/ pitfalls in the present system and shows that there is an urgent need for major overhauling of the system.
A. Justice Eradi committee recommendations
The Committee recommends that the provisions of Part VII of the Companies Act, 1956, be amended to include the provisions for setting up of a National Tribunal which will have-
a) the jurisdiction and power presently exercised by Company Law Board under the Companies Act, 1956;
b) the power to consider rehabilitation and revival of companies – a mandate presently entrusted to BIFR/AAFIR under SICA ;
c) the jurisdiction and power relating to winding up of companies presently vested in the High Courts.
In view of above recommendations Article 323B of the Constitution should be amended to set up National Tribunal. SICA should be repealed and the Companies Act, 1956 be amended accordingly.
B. Dr. J J Irani committee recommendations
Dr J J Irani, Expert Committee on Company Law constituted by the Government of India has submitted their report during the year 2005 to the Government. The Committee made the following major recommendations regarding liquidation and rehabilitation of sick companies.
1) The Insolvency law should strike a balance between rehabilitation and liquidation. It should provide an opportunity for genuine effort to explore restructuring/ rehabilitation of potentially viable businesses with consensus of stake holders reasonably arrived at. Where revival / rehabilitation is demonstrated as not being feasible, winding up should be resorted to.
2) Where circumstances justify, the process should allow for easy conversion of proceedings from one procedure to another. This will provide opportunity to businesses in liquidation to turnaround wherever possible. Similarly, conversion to liquidation might be appropriate even after a rehabilitation plan has been approved if such a plan was procured by fraud or the plan can no longer be implemented.
3) The Committee noted that a recent survey by World Bank has pointed out that it took 10 years on an average to wind up / liquidate a company in India as compared to 1 to 6 years in other countries. Such lengthy time-frames are detrimental to the interest of all stakeholders. The process should be time-bound, aimed at maximizing the chances of preserving value for the stakeholders as well as the economy as a whole.
4) The Insolvency process should be overseen by a neutral forum in a nonintrusive manner. Such a single, independent Statutory forum, should have the capacity and expertise to deal with the specialized commercial and technical characteristics of the Insolvency Law and the process; make an assessment and decide the course of action (rehabilitation or liquidation) that may need to be adopted at the earliest possible stage while balancing the interests of all stakeholders equitably.
5) Law should provide a reasonable opportunity for rehabilitation of a business before a decision is taken to liquidate it so that it can be restored to productivity and become competitive. However this opportunity should incentivize genuine effort. Special care should be taken to ensure that this is not misused by any stakeholder to delay proceedings, strip asset value or otherwise work to the detriment of the business and other stakeholders.
6) A definite and predictable time frame should be provided for attempt at rehabilitation and for the liquidation process. The existing time frame in India is too long and keeps precious assets locked in proceedings for many years, destroying their value in the process.
7) A period of one year should be adequate for rehabilitation process from commencement of the process till sanction of a plan. There should also be a definite time period within which proceedings may commence from the date of filing of the application for rehabilitation.
8) The process should limit the possibility of appeals at every stage so that the process is not delayed through frivolous appeals or stalling tactics.
9) On an average a time frame of two years should be feasible for the liquidation process to be completed.
10) A fixed time period should be provided for each stage of rehabilitation and liquidation process. Extension at every stage should be rare and allowed only in exceptional circumstances and in any case without effecting the outer time limit provided for the process.
11) The Insolvency process should apply to all enterprises or corporate entities including small and medium enterprises except banks, financial institutions and insurance companies.
12) The concept of sick industrial company should be replaced by insolvent company
13) Both Debtors and Creditors should have fair access to the insolvency system
upon showing proof of default.
14) Rather than erosion of net worth principle, test should prescribe default in payment of matured debt on demand (liquidity test) within a prescribed period. The balance sheet test tends to be more costly as it generally requires an expert evaluation to review books, records and financial data to determine the enterprise’s fair market value. While facilitating the invocation of process at an early stage, this would discourage manipulation of accounts to create erosion in net-worth. The opportunity of restructuring should be available before the asset is rendered non-performing.
15) Debtors seeking recourse to rehabilitation should be allowed to approach the Tribunal only with a draft scheme for rehabilitation for the consideration of Tribunal. This would bring forward genuine efforts of rehabilitation and provide an opportunity for assessing the viability of the business at the earliest to decide the appropriate course of action to be adopted.
16) Creditors being at least 3/4th in value should also be liable to file a scheme for rehabilitation.
17) If creditors approach for winding up, opportunity should be given to debtor to file
a scheme if such an opportunity is sought. The process should enable consultation of scheme with the creditors and converting the liquidation proceedings into restructuring proceedings, if the Tribunal is of the opinion that there are fair chances that the company may revive.
18) The law should require the provision of relevant information about the Debtor to
be made available for effective consideration of the scheme. The law should enable obtaining by the Tribunal, independent comment and analysis of that information by experts.
An efficient mechanism for revival and rehabilitation of the sick industrial undertakings is an essential part of a nation’s financial architecture, and is needed to encourage enterprise, underpin investment and economic growth and create wealth. It helps in creating a sound climate for investment, enable market participants to more accurately price, manage and control default risks and corporate failure, and encourage sound credit practice. It is vital to the stability in commercial relationships and financial systems, advance important social objectives of maintaining public confidence in the corporate and financial sectors and promote sustainable growth in the private sector. It promotes responsible corporate behavior by encouraging higher standards of corporate governance, including financial discipline, to avoid consequences of insolvency; preserve employment through an effective system for rehabilitating financially distressed but viable enterprises, while assuring maximum play in a fair reallocation of assets to more efficient market users through efficient liquidation system.
With the globalisation of the economy, the issues relating to corporate insolvency have assumed greater significance and a need has been felt for long for bringing about reforms in this branch of law. Moreover, with the Indian economy having been opened up for investment by foreign creditors and, internationally, the Indian corporate also making investments in companies outside, the realm of cross border insolvency law has multiplied colossally.
When the globalization and the subsequent international competition has thrown a challenge on us to compete in the global arena, we are not able to enact and put in to motion the efficient, time bound legal frame work to plug the perils and pitfalls that have been reported by the committee after the committee who have taken enormous pains in highlighting the drawbacks in the present system.