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Sick Industrial Companies Act

 

Objective:

 

Sick Industrial Companies (Special Provisions) Act, 1985, as indicated by its title and preamble, was a special legislation enacted in public interest with the twin objects of

 

➢ securing the timely detection of sick and potentially

sick companies

 

➢ speedy determination and enforcement of remedial measures in respect of such companies.

 

This Act was for giving effect to the policy of the state towards securing principles embodied in Article 39.

 

SICA was basically and predominantly a remedial and ameliorative, in so far as it empowered a quasi judicial Body-Board for Industrial and Financial Reconstruction (BIFR), to take appropriate measures for revival and rehabilitation of potentially sick industrial undertakings and for liquidation of non-viable companies.

 

Introduction:

 

Sick industrial unit is defined: as a unit or a company (having been in existence for not less than five years) which is found at the end of any financial year to have incurred accumulated losses equal to or exceeding its entire net worth. The net worth is calculated as sum total of paid up capital and free reserves of a company less the provisions and expenses, as may be prescribed.

 

An industrial unit is also regarded as potentially sick or weak unit: if at the end of any financial year, it has accumulated losses equal to or exceeding 50 per cent of its average net worth in the immediately preceding four financial years and has failed to repay debts to its creditor(s) in three consecutive quarters on demand made in writing for such repayment.

 

The two basic factors which may result in sickness of an industrial unit are:-

 

Internal factors are those which arise within an organisation. They include:-

 

  • Mismanagement in various functional areas of a company like finance, production, marketing and personnel;
  • Wrong location of a unit;
  • Overestimation of demand and wrong dividend policy;
  • Poor implementation of projects which may be due to improper planning or managerial inefficiency;
  • Poor inventory management in respect of finished goods as well as inputs;
  • Unwarranted expansion and diversion of resources such as personal extravagances, excessive overheads, acquisition of unproductive fixed assets, etc.;
  • Failure to modernise the productive apparatus, change the product mix and other elements of marketing mix to suit the changing environment;
  • Poor labour-management relationship and associated low workers' morale and low productivity, strikes, lockouts, etc.

 

External factors are those which take place outside an organisation. They include:-

  • Energy crisis arising out of power cuts or shortage of coal or oil;
  • Failure to achieve optimum capacity due to shortage of raw materials as a result of production set-backs in the supply industries, poor agricultural output because of natural reasons, changes in the import conditions, etc.
  • Infrastructural problems like transport bottlenecks;
  • Credit squeeze;
  • Situations like market recession, changes in technology, etc;
  • International pressures or circumstances, etc.

 

Industrial sickness may be a result of a combination of all such factors. It has several adverse consequences on the economy as a whole.

 

The important provisions of SICA :-

 

  • It provided for the constitution of two quasi-judicial bodies, that is, Board for Industrial and Financial Reconstruction (BIFR) and Appellate Authority for Industrial and Financial Reconstruction (AAIFR). BIFR was set up as the apex board to tackle industrial sickness and was entrusted with the work of taking appropriate measures for revival and rehabilitation of potentially sick undertakings and for liquidation of non-viable companies. While, AAIFR was constituted for hearing the appeals against the orders of the BIFR.

 

  • BIFR would make an inquiry as it may deem fit for determining whether any industrial company had become sick, subject to certain conditions

 

  • If the Board deems it fit to make an inquiry or to cause an inquiry to be made into any industrial company, it may appoint one or more persons as special director(s) of the company for safeguarding the financial and other interests of the company.

 

 

  • If after making an inquiry, the Board is satisfied that the company has become sick, it shall, after considering all the relevant facts and circumstances of the case, may take either of the following decisions:-

 

  • If the Board decides that it is practicable, it shall, by order in writing and subject to such restrictions or conditions as may be specified in the order, give such time to the company as it may deem fit to make its net worth exceed the accumulated losses.
  • If the Board decides that it is not practicable for the sick company to make its net worth exceed the accumulated losses within a reasonable time and that it is necessary or expedient in the public interest to adopt all or any of the measures in relation to the said company, it may, as soon as may be, by order in writing, direct any operating agency specified in the order to prepare a scheme providing for such measures in relation to that company. The measures may include:-

 

·         The financial reconstruction of the sick industrial company; -the scheme may provide for financial by way of loans , advances or guarantees or reliefs or concessions or sacrifices from Central Government, a State Government, any scheduled bank or any other bank or public financial institution or any other state level institution or other authority to the sick industrial company, this is also termed as rehabilitation by financial assistance.

·         The proper management of the sick industrial company by change in or take over of the management of the company;

·         The amalgamation of the sick industrial company with any other company (transferee company), or any other company with the sick industrial company (transferee company);  

·         The sale or lease of a part or whole of the sick industrial company;

·         Such other preventive, ameliorative and remedial measures as may be appropriate;

·         Such incidental, consequential or supplemental measures as may be necessary or expedient in connection with or for the purposes of the measures specified above.

 

 

  • If the Board 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 while meeting all its financial obligations and that the company as a result thereof is not likely to become viable in future and that it is just and equitable that the company should be wound up, it may record and forward its opinion to the concerned High Court. The High Court shall, on the basis of the opinion of the Board, order winding-up of the sick industrial company in accordance with the provisions of the Companies Act, 1956.

 

  • Where in respect of an industrial company, an inquiry is pending, or any scheme referred is under preparation or consideration or a sanctioned scheme is under implementation, then 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 shall be made. Also, no suit for the recovery of money or for 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 the Board or, as the case may be, the Appellate Authority.

 

  • Also with respect to the above conditions, the Board 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, to which such sick industrial company is a party or which may be applicable to such sick industrial company immediately before the date of such order, shall remain suspended or that all or any of the 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 the Board.

 

  • However, such declaration shall not be for a period exceeding two years, which may be extended by one year at a time , the total period shall not exceed seven years in the aggregate.

 

  • Under the Act, whosoever violates its provisions or scheme or any order of the Board or of the Appellate Authority, shall be punishable with imprisonment for a term which may extend to three years and shall also be liable to a fine. No court shall take cognizance of any offence mentioned except on a complaint in writing of the secretary or any such other officer of the Board or the Appellate Authority or any such officer of an operating agency as may be authorised in this behalf by the Board or the Appellate Authority

 

Transformation:

 

The regulatory mechanism of SICA was effective only to a limited extent. Some companies perceived SICA as an official exit route. It not only saved them from the harsh legal proceedings but also gave access to various relief and concessions from the financial institutions. Section 22 of SICA created havoc in the banking sector and the quantum of non-performing assets increased at an alarming rate.

 

Sick Industrial Companies (Special Provisions) Act,1985 (SICA) was repealed and replaced by Sick Industrial Companies (Special Provisions) Repeal Act,2003. The new Act diluted some of the provisions of SICA and plugged certain loopholes. It aimed not only to combat industrial sickness but also to reduce the same by ensuring that companies do not view declaration of sickness as an escapist route from legal provisions. Many provisions of SICA are incorporated in chapter VIA (Section 424A-424L) of the Companies Act in a considerably diluted form. Under it, the Board for Industrial and Financial Reconstruction (BIFR) and Appellate Authority for Industrial and Financial Reconstruction (AAIFR) were dissolved, and replaced by National Company Law Tribunal (NCLT) and National Law Appellate Tribunal (NCLAT) respectively.

 

 

Major Changes:

 

Definition of Sick Industrial Company

 

Under SICA

Sick industrial company means an industrial company (registered for not less than 5 years) which has at the end of the any financial year accumulated losses equal to or exceeding its entire net worth.

 

After Amendment

Sick industrial company means an industrial company, which has at the end of any financial year: 2(46AA)

● accumulated losses exceeding

50% of average net worth during 4 years; or

● has failed to repay debts to its creditor(s) in 3 consecutive quarters on demand made in writing for such repayment.

 

Constitution and procedures of the BIFR and Appellate Authority

This provision/establishment has been omitted, BIFR and Appellate Authority have been replaced by NCLT (National Company Law Tribunal) and NCLAT (National Company Law Appellate Tribunal) respectively.

 

Reference to the Board

Sec 424A is parallel to Sec 15 of SICA. Now the company is required to submit a scheme of revival & rehabilitation at the time of making reference to the

NCLT. Such reference has to be made within:

● 180 days after the Board of Directors came to know about

● 60 days of final adoption of accounts.

 

Further, it is also required to furnish a certificate from auditor on the panel approved by NCLT giving reasons for such reference. The responsibility for preparation of revival & rehabilitation scheme has now been casted on the company making the reference to NCLT. Thus, it is no longer the duty of the banksfinancial

Institutions.

 

Suspensions of legal proceedings, contracts etc

SICA provided complete immunity from legal suits, recovery proceedings and winding up petitions made during the inquiry and implementation of

the scheme.

 

No parallel provision in the new law. Recovery proceedings and suits against the sick industrial company can continue even if enquiry is pending with NCLT or revival & rehabilitation scheme is pending for preparation or implementation. No protection to sick industrial company against suits or legal proceedings for recovery of money or execution against property.

 

Comments
 sravani July 12, 2010
sica notes
 sravani July 12, 2010
sica notes
 arvind October 24, 2010
thanks a tons, very usefull information.
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