Read this article to learn about the sick industrial companies (special provisions) bill, 1997 in India!
The existing Sick Industrial Companies (Special Provisions) Act, 1985 is now sought to be repealed, with a view to tackling the problem of industrial sickness more effectively.
Hence, a new Bill, the Sick Industrial Companies (Special Provisions) Bill, 1997 was placed in the Lok Sabha on 16th May, 1997. The salient features of the new Bill are given below.
The new definition prescribes ‘debt default’ to a secured creditor as a criterion for identifying a sick company. Section 3(P) of the Bill states that:
a) If an industrial company defaults in payment or repayment, on due dates, of interest or principal or any other amount or any contribution thereof to any secured creditor, or
b) is irregular in its cash credit, working capital or any similar account, with a scheduled bank or any other secured creditor, for four or more quarters in a block of two successive financial years, such an industrial company is liable to be treated as a sick industrial company.
The common symptom of sickness, viz., and default in clearance of secured debts dispenses with the need for any other provision for dealing with potential sickness. However, the definition ignores many other important factors attributed to industrial sickness. As per the revised definition, even a healthy company or a company having temporary liquidity crunch may be declared to be sick.
Reference to the BIFR:
Under the SICA, 1985, an industrial company which has accumulated losses equal to or exceeding its entire net worth has to report itself as ‘sick’ to the BIFR. Then, the BIFR will sanction a scheme for the revival of the sick industrial company.
The new Bill permits a company which is not healthy to consult the BIFR on its own initiative before its condition worsens. It can seek the BIFR’s help as soon as there is a default in repayment of dues of its secured creditor or it is unable to comply with its obligations in any cash credit or similar account with a scheduled bank or any other secured creditor.
It is however free to chalk out its strategy for revival without the intervention of the BIFR. In case its peak net worth during the immediately preceding four financial years is halved by its losses, it is required to register itself with the BIFR.
Procedure to Deal with the Cases Referred to the BIFR:
There are many stages in the treatment of a sick company by the BIFR. Each stage is bound by the time schedule drawn up by the BIFR as under:
a) In the first instance, the BIFR will give an opportunity to the company itself to devise a suitable plan for the restoration of its normal health, in concert with its secured creditors and anyone else who is in a position to extend the necessary financial assistance to it. If everyone affected by the scheme agrees with it, the BIFR will have no objection to its implementation.
b) If the sick company is unable to enlist adequate support from the secured creditors, to submit an agreed scheme, the BIFR may try to mediate between them.
Alternatively, it may also attempt to work out “a viable restructuring scheme” that may be acceptable to the company and any bank or financial institution which may be in a position to lend it a hand, apart from its old secured creditors.
c) If the BIFR is not successful in its efforts, it may leave it to the secured creditors to prepare a scheme after consulting everyone concerned. The BIFR may sanction the scheme if has the approval of the secured creditors representing not less than 75% of the monetary value of the secured debt.
d) If all these efforts fail, the BIFR shall cause the sick industrial company or part or whole of any industrial undertaking of the sick industrial company to be sold as a going concern.
e) When the BIFR is frustrated by a dead end in all the above approaches, it may record its opinion that the above company should be wound up in the circumstances and on the basis of this opinion, the High Court ‘shall’ order the winding up of the company.
Now, the BIFR has become a mediator between the sick company, the creditors and other parties concerned. The judicial powers are taken away from the BIFR.
Suspension of Legal Proceedings:
SICA has provided for automatic stay on all legal proceedings, suits for recovery of money and enforcement of the security. There has been a marked tendency to abuse the provision in Section 22 of the existing Act’ which is meant’ to grant respite to a sick company burdened with liabilities. Now the blanket restriction on legal proceedings in Section 22 is substituted by specific orders of the BIFR.
New Bill Prevents Asset-Stripping of Sick Units:
Under the existing SICA provisions, the BIFR does not have powers to deal with promoters who strip the assets of companies referred to it. The amended SICA empowers the BIFR to direct banks and financial institutions to stop all financial assistance to a business group, if there is an evidence of asset-stripping by the promoters in a group company referred to the BIFR.
Abolition of AAIFR:
It is said that the Appellate Authority for Industrial and Financial. Reconstruction (AAIFR) is unnecessary and should be abolished. It is stated that one of the reasons for delay is that in more than 50% of the cases, owners have challenged before the AAIFR the closure of the sick units as recommended by the BIFR. Therefore, the new Bill proposes to abolish the AAIFR without substitution of any other authority.
Critical Appraisal of the Bill:
The Bill has failed to incorporate a number of recommendations of the sub-committee, which was headed by Senat Matha, Member of Parliament, to study the functioning of the national renewal fund and the BIFR. The suggestions made by this committee cover most of the defects in the functioning of the BIFR.
The following are some of the important recommendations of the sub-commit- tee which are not included in the Sick Industrial Companies Bill:
1. A decentralised board:
The Report states that the process adopted by the Board is time consuming and expensive. Therefore, it is suggested that like the Company Law Board, the BIFR should also be decentralised. This could be done by setting up regional benches in the States where the incidence of industrial sickness is high. However, the Bill makes no such provision.
2. Monthly reports by special directors:
The report also points out that most of the special directors appointed by the Board are retired Government officers. It suggests that the special directors should visit the sick company’s plant and give monthly reports of their visits so that the Board is kept informed of the developments in the company. This would help in creating a constant monitoring mechanism. However, the Bill does not make this mandatory.
3. Independent agency:
The report suggests that the Board should have an independent agency, to assess the viability of the various schemes that may be suggested. This is because often the financial institutions, functioning as operating agencies, are absolutely biased for reviving the company.
Even though the Bill has done away with the appointment of financial institutions as operating agencies, it does not make any provision for an independent agency to evaluate the schemes.
4. Appointment of provisional receiver:
The report also mentions that the BIFR should have more interim powers pending the inquiry not only to prevent disposition of assets but also to appoint a provisional receiver in cases where the company’s operations are shut down.
The Board should also have the power to appoint a provisional manager or agent to take over the management and run the unit, especially in cases where the unit is being operated in a dishonest or fraudulent manner. The Bill contains no such ‘provision.
5. BIFR to sell assets:
Section 20 of the SICA empowers the Board to sell the assets of a sick company that is recommended to be wound up and forward the sale proceeds to the High Court concerned for distribution in accordance with the provisions of the Companies Act.
It is stated that in this situation, the case goes outside the purview of the SICA and enters the realm of the Companies Act. As such, courts can insist that sale of assets under the SICA should be structured according to the procedures laid down under the Companies Act. The report suggests that this legal ambiguity be removed so that the BIFR can sell the assets of a company after deciding to wind it up.
6. Sectorial recommendations:
The report says that the Board so far deals on a case to case basis whereas sectorial recommendations are necessary for preventing further sickness. Therefore, it is recommended that the BIFR should make recommendations for restructuring an industrial sector or draw up a policy package for the specific industry that would be a preventive measure.