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PROCESS OF REVIVAL AND RESTRUCTURING OF SICK COMPANIES

Written by: Ratnam and Atishay Jain


INDUSTRIAL SICKNESS


Meaning


A sick industry refers to an enterprise whose income stream at the end of a financial year is not in line with the mission and vision of the company or is at a loss equal to or greater than the net worth of the company. Such an industry may occur in the form of a loss of cash or other financial resources. This will mean that the company depends on other firms for loans in such a case and is unable to repay the debts.


As per RBI


“a sick unit is one which has reported cash loss for the year of its operation and in the judgment of the financing bank is likely to incur cash loss for the current year as also in the following year.”


Reasons behind industrial sickness


• Delay in the purchase of land and construction of buildings

• Delayed procurement of financial aid from public financial institutions

• Problems linked to technical and administrative personnel recruitment.

• The Government's delay in sanctioning licences, permits, etc.

• Significant improvements in the operating size and optimal product mix in the long term and, last but not least,

• Changes in the government's policies about the transportation of goods inside the country from one location to another, etc.


PROVISIONS FOR REVIVEL OF SICK UNITS


Under sick industrial companies act 1984


A main piece of legislation dealing with the problem of rampant industrial sickness in India was the Sick Industrial Companies Act of 1985 (SICA).In India, the Sick Industrial Companies Act (SICA) was enacted to diagnose unviable ("sick") or potentially sick companies and to assist, if necessary, with their recovery or closure, if not. This measure was taken to unleash investment locked up for productive use elsewhere in unviable firms.


The creation of two quasi-judicial bodies, the Board for Industrial and Financial Reconstruction (BIFR) and the Appellate Authority for Industrial and Financial Reconstruction (AAIFR), was a significant SICA provision. As an apex board, BIFR was set up to spearhead the problem of industrial illness, including reviving and rehabilitating potentially sick units and liquidating non-viable businesses. In order to hear appeals against BIFR directives, AAIFR was set up.


REPEAL


The Sick Industrial Companies (Special Provisions) Repeal Act of 2003, which weakened certain SICA provisions and filled some loopholes, abolished and substituted SICA.A main reform in the new Act was that, in addition to combating industrial sickness, it sought to minimise its increasing incidence by ensuring that businesses did not simply make use of sickness declarations in order to avoid legal obligations and obtain access to financial institutions' concessions. On December 1, 2016, the abolition of SICA came into full effect. It was, in part, entirely repealed because some of its clauses overlapped with the 2013 Companies Act.


UNDER COMPANIES ACT


Chapter XIX of the Companies Act, 2013 deals with the recovery and reconstruction of suffering enterprises. It includes solely the requirements for determination of sick units, the application for revival and rehabilitation, the appointment of the temporary administrator, the creditors' committee, The appointment of the administrator, the company administrator's powers and responsibilities, the revival and rehabilitation plan, the sanctioning of the scheme, the implementation of the scheme, the winding-up of the company on the managers' report, etc. Therefore, this article shall deal in detail with certain provisions relating to the revival and recovery of sick undertakings.


How to determine sick units


The determination of a company's condition is addressed in Section 253 of the Companies Act, 2013. According to it, any secured creditor of a corporation representing 50 percent or more of the unpaid sum of debt having failed to pay the debt within thirty days of the notice of demand being served or to secure or compound it to the creditors' appropriate satisfaction, and any secured creditor shall file an application to the court in a specified manner mentioning all the required evidence of non-payment defaults.


Upon receipt of the application from the secured creditor, the tribunal shall then rule about whether or not a corporation has become ill within sixty days on the merit of the request.

Once the authority is satisfied that a corporation has become a sick corporation and is able to repay its debts, it shall order the company to repay its debts within a reasonable period of time.


Renewal and Rehabilitation Application


Section 254 of the Companies Act, 2013 deals with a request for rehabilitation and restoration whereby any company that has been identified as a sick company pursuant to section 253 of the Act may apply to the tribunal for the appropriate rehabilitation and rehabilitation measures to be taken.

1.Audited business financial statements relating to the financial year immediately preceding them;

2. Such information and records, properly certified in such a way, along with the fees that may be prescribed.

3.A draught scheme for the company's restoration and recovery in the manner prescribed.

The complaint shall be placed before the tribunal within sixty days of the date the tribunal declares the corporation as a sick company under section 253 of the Companies Act, 2013


Appointment of Interim Administrator


As per section 256 of the Act, as soon as a request is made pursuant to section 254 of the Act, the Tribunal shall set a date of examination and appoint an interim administrator who, within 45 days of his appointment, shall schedule a meeting with the company's creditors and prepare a proposal for revival scheme and submit it to the court within sixty days of the meeting.


In the absence of a proposed scheme, the tribunal shall direct the interim administrator to take over the management of the undertaking and, in the absence of an interim administrator to take over the administration of the undertaking, the director and management of the undertaking shall provide the interim administrator with complete participation and support.


The Creditors Committee appointed by interim officer


Under section 257, an interim administrator shall designate such number of creditors as he may decide but shall not exceed seven, and such members shall meet at all meetings, and the interim administrator may order all promoters, executives, key managers of the company to attend meetings and provide the needed details.


Tribunal Order


On the date of the hearing set by the tribunal, if the three-fourth member of the company determines that it is impossible to revive and rehabilitate the sick company or to revive and rehabilitate the sick company by taking certain steps, the tribunal shall issue certain orders and may, where appropriate, appoint a company administrator to discharge his roles as per the act.


Revival and Recovery System


The recovery and rehabilitation scheme shall be formed by the business manager in compliance with the provisions of section 261 and shall include steps such as the financial reconstruction of the sick business, the proper management of the sick company, the amalgamation of the sick company with another company or other company with a sick company, the acquisition of the sick company by a solvent company, the sale or lease of the sick company with another company or other company with a sick company, the acquisition of the sick company by a solvent company, the sale or lease of the sick company.


Company Winding Up as per the Company Manager Survey


According to the provisions of section 263 of the Act, if the arrangement is not accepted by the creditors, the corporation will be wound up and the administrator will send the report within fifteen days and the tribunal will order the liquidation of the business.


Fund for Rehabilitation and Insolvency


A fund for the reconstruction, reconstruction and liquidation of sick companies shall be created in accordance with section 269 of the Act, which shall be referred to as the Rehabilitation and Insolvency Fund.


Conclusion


Thus, the Companies Act provides exhaustive measures for the revival and rehabilitation of the sick companies and the tribunal is vested with powers to take all necessary measures for the revival and rehabilitation of the sick companies.


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3 Comments


Shivalika Verma
Shivalika Verma
Oct 29, 2021

Well- framed

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Shraddha Singh
Shraddha Singh
Oct 29, 2021

Educative 👍🏻

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Great work Ratnam and Atishay Jain.

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