REVIVAL / CLOSE DOWN OF SICK COMPANIES THROUGH SICK INDUSTRIAL COMPANIES
ACT. 1985 (SICA) ROUTE…. PERILS AND
PITFALLS
By
Dr. T Padma., LLM, Ph D
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[1].
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[2]”.
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 or 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 [3]
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[4] 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[5]
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[6]
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 Irony
is that this amendment has provided time bound schedule in the new legislation
and we hope that this amendment 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. The
constitutional validity as to the setting up of NCLT is pending before the
Supreme Court of India 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 of 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 far away 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 leval
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[7]
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.
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
or enterprise.
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.
Conclusion
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 abot 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.
Therefore, it is the high time that the policy
makers should realize the importance of resolution of these perils and pitfalls
and focus their attention and put in their efforts so as to smoothen the
hurdles that may arise in the process of bringing the changes that are needed
to create an atmosphere to ensure that the human and economic resources of the
country are continuously re-channelised to the maximum extent possible, thereby ensuring the optimum utilization of
the existing resources to increase the overall productivity of the economy, so
that India will survive in the global competition and will become strong
economic power by 2020.
[Puiblished in Andhra Law Times / Fortnightly
March 2010 Part – 5;
April 2010, Part 7].
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Note:
The Author is a member of A P State Higher
Judiciary. The views expressed in this
article are purely personal.
[1] The Tiwari Committee on Rehabilitation of
Sick Units was constituted by RBI in 1981. The committee has examined
the legal and other difficulties faced by banks and financial institutions in the rehabilitation
of sick industrial undertakings and
suggested remedial measures, including changes in law and submitted its report
in 1983.
[3] (1997) 89 Comp Cas 609 (SC)
[4] [2001] (3) Kar
LJ 622 (DB); ILR 2001 Kar 5373 (DB)
[5] [1993] 78 Comp Cas 803 (SC)
[6] AIR 2000 CLC 1492: (2000) 4 Comp LJ 9 (SC)
[7] Justice Eradi Committee Report on Law relating to
Insolvency of Companies
[8] Dr.J J Irani Committee Report on Company Law
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