With the Indian economy rebounding and expanding, the term ‘Industrial Sickness’ had gained a lot of traction as it unapologetically strained the economic systems and conditions of financial institutions as well as severely dented the prospects of new investments. In order to tackle the industrial sickness, the Government had adopted the ad-hoc measures. Nationalization of banks was one such measure but that did not last for too long. Such kind of measures did not yield a permanent solution.
Industrial sickness had typically a deleterious impact on Indian economy as the Indian economy was initially and even now driven particularly because of industries such as cotton, Jute, Sugar, and Textile, small steel and engineering and these industries were severely hit by industrial sickness and this compounded the problem for the overall economy. In India, both the large- and small-scale sectors are seeing exponential growth in industrial sickness. Industrial sickness not only has a deep impact on the owners, employees, and creditors but it has amplified the wastage of national resources and led to social unrest. It is, therefore, considered very much important to come up with appropriate measures for dealing with sick units in addition to make fitting arrangements for recognizing the indicators of industrial sickness at an early stage in order to take the preventive actions for sickness. The progression of industrial sickness has been underlined from the pre-independence era to the current prevailing condition. The Rehabilitation to sick companies is not the answer and solution for the industrial sickness.
In India, the face-off with industrial concerns were first confronted with Industrial Policy in 1948 and then in 1956 through the directed and regulated economy, which later on after a lot of deliberations tried to be addressed through a free-market economy in 1991. Between Industrial Policies and the opening of the Indian economy in the year 1991, the Tiwari Committee was constituted in the year 1981 for wide-ranging and concentrated recommendations to tackle industrial sickness in India In 1985, the Sick Industrial Companies (Special Provisions) Act (hereinafter referred to as ‘SICA’) was enacted as a result of the recommendations of the Tiwari Committee. Board for Industrial and Financial Reconstruction (hereinafter referred to as ‘BIFR’) was set up for the determination of sick companies and their revival.
Later on analysis of the endless delays in the matter of sick companies by BIFR, the Government in the year 1999 constituted the committee under the chairmanship of Justice V. Balkrishna Eradi, a former retired Supreme Court Judge, the committee recommended the repeal of SICA and telescoping the provisions for Sick companies in the Companies Act. Subsequent to it, another committee headed by N.L. Mitra recommended the disbandment of BIFR and AAIFR and which came to be accepted in the Companies Amendment Act, 2002. The Companies (Second Amendment) Act, 2002 was introduced to provide for revival and rehabilitation of sick companies. The amendment act, 2002 sought to replace the two-tiered mechanism of BIFR and Appellate Authority for Industrial and Financial Reconstruction (AAIFR) in SICA with NCLT and NCLAT. However, the said amendments were not notified.
Causes of Industrial Sickness
A company can become sick because of a number of reasons. The common assumption is that the occurrence of sickness is the product of the economic conditions and the global impact that is whittling economic viability. The causes of the sickness may differ from unit to unit. Yet it is possible to group the most familiar causes of sickness under two internal and external heads. In India, the Tiwari Committee described the causes of illness in many heads in its report
A. Internal Causes
There are those elements that come under the management’s control. Because of the following conditions sickness of companies arise: –
a. Finance: Finance is the backbone of every business. Lack of investments for new projects, mismanagement of the funds, not managing the liquidity and capital reserve ratio, etc. lead to the financial crisis.
b. Technology: Use of the latest technology for the business is the need of the hour. Lack of knowledge an outdated technique is an example of an internal cause of sickness.
c. Labour: The factors including labor as a cause of sickness may include wages, more labor recruited than actual demand, the skill of labor, labor welfare.
d. Production: The production should meet the demands of the markets. The quality of the products should be maintained in the long run in the market.
e. Location: Many things depend on the location such as transport cost, skilled labor, availability of resources, and reach to the market.
f. Administration: This section of the company has to manage the company. Implementation of policies, connect with customers, on-point market research, mobilization of funds, adequate expenditure on know-how is the duty of the administrative department.
B. External Causes
a. Infrastructure: The growth of the business depends upon the infrastructure. Infrastructure includes water, land, electricity, and roads. Thus, the growth of the state depends upon the infrastructure provided.
b. Finance: The companies which face problems raising funds, investments are generally small in nature. The units which don’t have substantial assets against their name find it difficult to raise the money. The government schemes take very long to disburse the amount. Financial institutions lend money at a higher rate.
c. Government: Government plays a very crucial role. The policies implemented, rate of import duty, Procedures of renewing the license, and other laws enforced through regulating bodies.
d. Market: Market research is very important to sustain in the long run. To adapt to the tax policies, globalization, licensing, technology are the challenges faced by the company from the market.
e. Other factors: The situations that bring the business to a standstill are acts of God, war, labor strike, pandemic, and political circumstances, etc.
Legislation-oriented approach to solving anomalies, inefficiencies
Sick Industries Companies Act, 1985
The act was enacted to speed up the process of revival of sick companies and to wind up those companies which could not be revived. A board was formed to implement and direct the rehabilitation schemes and examine and modify the schemes which were failing to address the issue. The board was named as BIFR as mentioned in the introduction. The board had the power to grant relaxations to the sick companies.
The Need For Law
There was need to revive the sick industries if possible because many aspects were related to the sick company which would affect the economy. Aspects such as investors, assets of the companies, members of the companies, employees, etc. were related to the sick company. So, a special law was introduced for revival and rehabilitation of sick industries. It was also enacted to release the locked-up investment in unviable companies so that economic and financial activities in the nation are not clogged and the Indian economy is prevented getting paralyzed.
Objectives of SICA
- To detect the sick companies and provide an opportunity for the revival of the company.
- To rehabilitate the sick units if it is feasible or to help them with the winding-up scheme.
- To expedite the procedure of winding up of the sick company if there is no chance for the revival of the sick company.
- To curb the wastage of resources of public and private sectors as the economy of the country is affected.
- To safeguard the workers of the sick units as far as possible.
- Loopholes in the act were exploited by the management to gain the benefits and raise the funds. Amendments were made to stop the misuse of loopholes.
Definition of sick industrial company
Initially before the repeal of Sick Industrial Companies Act (hereinafter referred to as “SICA”), the term ‘Sick Industrial Company’ had been provided under Section 3 (o) of the SICA Act as-
“Industrial company (being a company registered for not less then five years) which has at the end of any financial year accumulated losses equal to or exceeding its entire net worth”
Preparation and Sanction of a Scheme for Revival
Once BIFR finds that a company is sick, it gives a certain amount of time to the company to get out of the sickness and make the net worth positive without any financial external aid. If BIFR comes to a conclusion that even after granting certain amount of time it is impossible for the company to get its net worth on the positive side, then the board will appoint the operating agency. The operating agency shall prepare and apply a plan with respect to the company referred by including the following measures:
- Financial Reconstruction;
- The management of the company by a change in, or takeover of, the management of the sick industrial company;
- Sale or lease of its undertaking;
- Rationalization of its staff.
The Operating Agency must provide the revival scheme within 90 days to BIFR. The revival scheme will differ from case to case.
Rehabilitation by Giving Financial Assistance
On receiving the draft of the revival scheme, the BIFR will forward the draft to the interested parties of the draft. The draft is sent to the interested parties for their suggestions. BIFR will also publish the revival scheme in the newspaper inviting suggestions and objections from the shareholders, creditors, employees. BIFR will make the modifications if necessary.
C. Companies Act, 1956
After the repeal of SICA Act, the definition of sick industrial company provided under the Companies (Amendment Act) 2002 was notified and inserted under Section 2(46AA) of the Companies Act, 1956, according to which an industrial company is a sick industrial company which has:
- the accumulated losses in any financial year equal to fifty percent, or more of its average net worth during four years immediately preceding such financial year; or
- Failed to repay its debts within any three consecutive quarters on demand made in writing for its repayment by a creditor or creditors of such company.”
Part 6A of the Companies Act from Section 424A to 424L comprise of provisions regarding the Revival and Rehabilitation of Sick Industrial Companies. It laid the parameters as well as the requisite procedure for sanction of scheme and penalty for violation of the part or scheme. These provisions somewhat turned superfluous after the enactment of Insolvency and Bankruptcy Code, 2016.
The Companies Act, 2013
The Committee constituted in 2005 under the chairmanship of JJ Irani on revival and rehabilitation of sick companies submitted its report which indicated the need for separate laws regarding revival and rehabilitation of companies. The report had a chapter on “Reconstruction and Liquidation. The report recommended having transparent and globally accepted rules and regulations for reconstruction and liquidation of the companies. The process from registration to winding up of the company should be available in one law.
The term “sick companies” were replaced by “insolvent companies” and the parameters of the sickness test were changed from the net worth of the company to the liquidity ratio maintained by the company. The report remains silent on whose responsibility would it be in case of incompetence in corporate governance. Professional such as Chartered Accountant, Company Secretary, Cost, and Works Accountant were recognized as insolvency professionals by the law. The “Rehabilitation Fund” replaced the “Insolvency Fund” and the contribution made by the company were made optional. Prior to the IBC 2016, the Companies Act 2013 had the provisions set out below which were later omitted by the IBC, 2016. These provisions under the Companies Act, 2013 though were framed to replace the revival and rehabilitation of the companies provisions under the Companies Act, 1956 however they were not notified and therefore till the time of Insolvency and Bankruptcy Code, 2016 modifying Section 4(b) of the SICA Repeal Act, revival and rehabilitation of companies continued to be governed by the CA, 1956 which were later clarified to be repealed by the Insolvency and Bankruptcy Code (Removal of Difficulties) Order, 2017
Regulatory Framework-Revival and Rehabilitation of Companies (Non-notified Companies Act 2013 provisions)
Under the non-notified Companies Act, 2013 provisions with respect to Revival and Rehabilitation of Companies, firstly sickness has to be determined by the tribunal, after filing of an application by secured creditors representing a certain percentage of outstanding debt, the applicant, the Central Government, a state government, a public financial institution, or a scheduled bank, in terms of the parameters laid in Section 253 of Act and in case of satisfaction on the company being a sick company, the tribunal shall provide reasonable time to the sick company to repay the debt. After the above determination, the application for revival and rehabilitation shall be made within 60 days of above determination before the tribunal by any secured creditor representing a specified percentage of outstanding debt or the company. Thereafter, there is an appointment of an interim administrator under Section 256 to carry out the required work as laid under the ‘Act’ including the appointment of the Committee of Creditors in accordance with provisions. Afterwards, on submission of report by an interim administrator, if the tribunal on the satisfaction of conditions specified under Section 258 is of the resolve that company cannot be revived and rehabilitated, the tribunal shall either order for proceedings of winding up of the company or by adopting certain measures, the company may be revived or rehabilitated, the Tribunal shall appoint a company administrator under Section 259 for preparation of scheme of revival and rehabilitation of the sick company.
After the preparation of scheme is in accordance with the Section 261, the scheme shall be placed before the creditors of sick company for their approval by company administrator within a period of 60 days from his appointment or within such extended time as may be prescribed. After compliance with the provisions of Section 262, the scheme shall be examined by the Tribunal and copy of draft scheme be sent to different stakeholders as required under Section 262 (3) for suggestions and objections and thereafter the tribunal may make such modifications to the draft scheme as suggested or objected and accordingly then sanction be accorded by the tribunal to the scheme and subsequently scheme be filed with the Registrar.
D. Insolvency and Bankruptcy Code, 2016 and the Treatment of Sick Companies
For the purpose of evolution of the provisions from the SICA to the present code below discussed in brief about the presently governing IBC without delving into detail on the procedures and provisions under the code.
After the incorporation of the Insolvency and Bankruptcy Code, 2016 (hereinafter and below thereafter referred to as ‘IBC’), the proceedings pending under the SICA stood abated. In addition to that, Sick Industrial Companies (Special Provisions) Repeal Act, 2003 via notification dated 25.11.2016 and with effect from 1.12.2016 repealed the SICA, 1985
After an amendment through IBC, 2016 to Section 4 (b) of the Sick Industrial Companies (Special Provisions) Repeal Act, 2003, earlier incorporated provision for references and inquiry in accordance with the Companies Act, 1956 was substituted with references and inquiry in accordance with the IBC, 2016. With respect to code, any reference made or inquiry etc. pending before the Board or the Appellate Authority under the Sick Industrial Companies (Special Provisions) Act, 1985 stood abated and would henceforth to be guided and proceeded in accordance with Section 4 (b) as amended and substituted by the code. The term of 180 days from the commencement of the IBC has been provided for companies to make reference before NCLT in respect of above-abated reference, appeal or inquiry. In the case of the M/S ATV project (India) Ltd. V Union of India & Ors., the Hon’ble Delhi High Court, while evaluating the constitutional validity of Section 4 (b) of the above Repeal Act, held that once a law is repealed and new legislation has been put in its place, it is not open to anyone to contend that it should continue to be governed by the old legislation, except where actions upon the existing laws had concluded.
As IBC primary object was to consolidate the existing laws concerning the reorganization and insolvency resolution of corporate persons, it was considered appropriate to amend the Companies Act, 2013 vide notification dated 15.11.2016 and with effect from the same date, the provisions concerning the sick companies were omitted. Section 255 of the IBC, 2016 read with the Eleventh Schedule omitted provisions from Sections 253 to Section 269 of the Companies Act, 2013 regarding the Revival and Rehabilitation of Sick Companies.
Presently, the IBC moved away from the tests of ‘sickness’ as charted under the SICA and the Companies Act, 2013 to the test of ‘cash flow’ thereby laying the framework of more objectivity in the assessment. On determination of sickness, the further process as charted in the IBC begins. In addition to it, the IBC veers from the former insolvency model of ‘debtor-in-possession’ to ‘creditor-in-possession’ so as to replace the board of borrowers with the committee of creditors. The separate processes laid out in the provisions for corporate insolvency resolution process and liquidation of companies have comprehensively simplified and covered the hitherto repealed or modified provisions in labyrinth of laws. The term ‘sick’ is no more part of the IBC and instead of the code deals with corporate entities irrespective of sick or not therefore the ambit of the code is wide if the requisite parameters of IBC are satisfied and proceedings are sought to be initiated under the IBC, 2016
In any economy, stability is necessary for its positive and persistence growth. The sick condition of companies impacts employment, financial resources and other resources of the nation. It is in national interest that a strong and simple law of revival shall be there for the persistent growth of the economy, individual
The measures provided by the IBC for the revival and rehabilitation of the sick companies are exhaustive as it not only repealed the revival and rehabilitation provisions earlier either apparently notified under the Companies Act, 1956 or non-notified and omitted provisions under the Companies Act, 2013 and in addition to that, it brought moderate to sweeping changes in different legislations after consolidating many legislations. The necessary powers regarding the scheme of revival and rehabilitation of the sick companies are vested with the NCLT. These provisions of the IBC, 2016 are tested on the pedestal of their scope, limitations, and convergence, etc.
- Companies Act, 1956
- 2018 (1) TMI 953
- Insolvency and Bankruptcy Code 2016, s 255
- In Re: Ashapura Minechem Limited  216 CompCas 573
This article has been written and submitted by Mr. Nandan P. Gajendragadkar during his course of internship at B&B Associates LLP. Mr. Nandan is a third-year law student at the Shankarrao Chavan Law College, Pune University.
Moderated by Shubham Khunteta (Associate).