Convergence of SICA- A paradigm shift to Industrial Sickness
and Rehabilitation
Presentation by:CS Satwinder Singh
B. Com, FCS, LL.B., CAIIB
Central Council Member - ICSI
Partner, Vaish Associates
Past Chairman NIRC of ICSI
(2007)
PREFACE
Companies Second (Amendment) Act, 2002 (Second Amendment Act) - Part-VI A
(Section 424A to 424L) were introduced in the Companies Act, 1956 but not made
effective.
NCLT and NCLAT were to replace BIFR and AAIFR through the Second Amendment
Act.
SICA was to be repealed through Sick Industrial Companies (Special Provisions) Repeal
Act 2003- Not made effective.
JJ Irani Committee recommendations on revival and rehabilitation finds place in the
Companies Act, 2013 (2013 Act).
Constitutionality of NCLT and NCLAT upheld by the Supreme Court – 14.05.15
The provisions of 2013 Act yet to be made effective. SICA continue to be operative till
NCLT provisions are made effective.
BROAD FRAMEWORK OF SICA
Applicability of SICA:
Industrial company having a sick or potentially sick industrial
undertaking
Industrial Company - a company which owns one or more industrial
undertakings.
Industrial Undertaking – any undertaking pertaining to a scheduled
industry carried on in one or more factories by any company and does
not include:
ancillary industrial undertaking; and
a small scale industrial undertaking.
BROAD FRAMEWORK OF SICA
Applicability of SICA:
Sick industrial company:
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 net worth.
On determination of sickness the company shall within 60 days
from the date of finalization of the duly audited accounts for the
relevant financial year, the company shall make a reference to
BIFR for determination of the measures which shall be adopted for
the company.
BROAD FRAMEWORK OF SICA
Applicability of SICA:
Sick industrial company:
Penalty- Whoever violates the provisions of SICA or the scheme
made thereunder or any order of BIFR or the Appellate Authority
and makes a false statement or gives false evidence to BIFR or the
Appellate Authority, shall be punishable with simple imprisonment
for a term which may extend to three years and with fine.
BROAD FRAMEWORK OF SICA
Applicability of SICA:
Potentially sick company –
An industrial company whose accumulated losses, as at the end of
any financial year, have resulted in erosion of fifty per cent or more
of its peak net worth during the immediately preceding four
financial years.
Where a company becomes a potentially sick company, amongst
other things, it shall:
• report BIFR of such erosion within a period of sixty days from
the date of finalisation of the duly audited accounts;
BROAD FRAMEWORK OF SICA
Applicability of SICA:
Potentially sick company –
Penalty for default – every director or other officer of the
company who is in default shall be punishable with imprisonment
which shall not be less than six months but which may extend to
two years and with fine.
CASE STUDY
ABC Private Ltd. is a wholly owned subsidiary company of a foreign body
corporate incorporated in the year 2010 under the provisions of the
Companies Act, 1956 and is an industrial company under the provisions of
SICA. The Company does not have any secured or unsecured creditors. The
provisional financial position of the company as at 31.03.2015 is as under:
S.No. Financial
Year
Net worth
(INR in Cr.)
Accumulated
Losses (INR in
Cr.)
Audited/
Unaudited
1. 2010-2011 22 14 Audited
2. 2011-2012 50 35 Audited
3. 2012-2013 100 52 Audited
4. 2013-2014 100 80 Audited
5. 2014-2015 135 110 (approx.) Unaudited
Key changes in Revival & Rehabilitation
Particulars Companies Act, 2013 SICA, 1985
Tribunal/
Appellate
Tribunal
NCLT/NCLAT BIFR/AAIFR
Sickness The inability of the company to
pay or secure or compound the
payment on demand by its
secured creditors representing
50% of the outstanding debts
within 30 days of notice of
demand. The secured creditors of
the company in such an event
may file an application with the
Tribunal to declare the company
sick. (section 253 (1)).
No such provision
Particulars Companies Act, 2013 SICA, 1985
Sick
Company
• The term “Sick Company” is
not defined in the New Act.
• Sickness criteria is given in
section 253(1).
• Tribunal to declare a company
as “Sick Company” within 60
days.
Any 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. Section
3 (o).
Potentially
Sick
Industrial
Company
No such provision Section 23 specifies that if
the accumulated losses of an
industrial company, as at the
end of any financial year
have resulted in erosion of
50% or more of its peak net
worth during immediately
preceding 4 financial years
such company shall be
considered as potentially
Sick Company.
Particulars Companies Act, 2013 SICA, 1985
Stay on
pending
proceedings
• Only on application under
section 253 (2), the Tribunal
may order to stay any
proceedings as specified under
section 253 (2) w.r.t the
company.
• The stay would be operative for
120 days. (section 253 (3)).
• Once a reference is
admitted in BIFR, all the
proceedings shall stand
suspended as prescribed
under section 22.
• No time period for stay
order.
Non
disposable
obligation.
On filing an application, the
company shall not;
• dispose of any assets, or;
•otherwise enter into any
obligation with regard to, its
properties or assets
except, if done in the normal
course of business. (section
253(6))
BIFR may by order in writing,
direct the sick company to
not dispose of its assets,
except with the consent of
BIFR. (refer section 22A)
Particulars Companies Act, 2013 SICA, 1985
Limitation
period
Stay order period shall be
excluded in calculation of the
period of limitation. (section 255)
No such provision.
Application
by a Secured
Creditor to
the Tribunal
for Revival
and
Rehabilitatio
n of the
Company.
Once the company has been
determined as a sick company,
then the secured creditors may
make an application within a
period of 60 days to the Tribunal
for the determination of the
measures that may be adopted
with respect to the revival and
rehabilitation of the such
Company. (section 254(3))
No such provision.
Particulars Companies Act, 2013 SICA, 1985
Overriding
effect of the
SARFAESI
Act
SARFAESI Act has an overriding
effect on the provisions of Chapter
XIX for abatement of any
reference made or to be made
under section 253, if;
• secured creditors representing
75% of outstanding debt have
taken measures to recover their
debts under the SARFAESI Act,
or;
• financial assets is taken over by
the AMC under section 5(1) of
the SARFAESI Act. (section
254)
Similar provisions are
provided under section 15
of SICA.
Appointment
of Interim
Administrator
(section 256)
Once declared as a sick company
on receipt of application for
revival and rehabilitation, the
Tribunal shall appoint a interim
administrator (IA) within 7 days
from the receipt such application
An operating agency (OA)
was appointed by BIFR to
undertake an enquiry into
the affairs of the Company.
Particulars Companies Act, 2013 SICA, 1985
Duties &
Powers of
the Interim
Administrat
or
•To convene meetings of the
committee of creditors within
45 days.
• To provide report to the
Tribunal within 60 days.
•To takeover the management of
the company, if directed by the
Tribunal.
(section 256)
No such powers with the
BIFR to direct the OA to
takeover the management of
the company on the ground
that there is no scheme of
revival and rehabilitation
(Scheme) of the Company
filed by the company along
with he application.
Committee
of Creditors
The IA shall appoint a committee
of creditors before calling the
meeting with maximum 7
members constituting a
representative each of every class
of creditors as far as
possible.(section 257)
No such provision.
Particulars Companies Act, 2013 SICA, 1985
Company
Administrat
or
On the date of hearing fixed by
the Tribunal and after
considering the report of the IA,
the Tribunal if thinks it feasible
to revive or rehabilitate the
company, then it shall appoint a
company administrator (CA).
(section 258)
No such Provision.
Preparation
of the
Scheme by a
Company
Administrat
or
CA, shall prepare or cause to
prepare a scheme of revival and
rehabilitation after considering
the measures, if any as
recommended by the creditors in
their meeting. (section 258)
No such provision in SICA.
However the OA appointed
by BIFR is responsible to
prepare the Scheme.
Particulars Companies Act, 2013 SICA, 1985
Appointment of
Administrators
(section 259)
• The administrators appointed
by the Tribunal shall be
appointed from a databank to
be maintained by the CG or
any institute or agency
authorized by CG in a
prescribed manner .
• The databank will consist of
Company Secretaries,
Chartered Accountant, Cost
Accountant and such other
professionals as may be
specified by CG.
No such provision. BIFR
normally appoints an
institution as the OA which
are generally banks and
financial institutions.
Takeover of the
Sick Company
Takeover of the sick company
by any other solvent company
may form a part of the
Scheme. (section 261 (2)(d)).
No such Provision.
Particulars Companies Act, 2013 SICA, 1985
Approval of
the Scheme
by the
Secured
Creditors
and
Unsecured
Creditors
The revival and rehabilitation
through a scheme will now be
only possible if the scheme is
approved by 75 % of secured
creditors in a meeting convened
by the CA along with 25% of
unsecured creditors. (section
262(2)
No such provision.
Process for
approval of
the Scheme
Process is defined in section 262
of the New Act.
• Meeting within 60 days of the
appointment of CA.
• Maximum extension by
Tribunal -120 days.
• Separate meetings for secured
and unsecured creditors.
No such provision.
Particulars Companies Act, 2013 SICA, 1985
Scheme to be
binding.
(section 263)
Once approved, the Scheme shall
have a binding effect from the
date it becomes operative.
No such provision.
Monitoring
the Scheme.
The CA appointed by the
Tribunal shall on order by the
Tribunal monitor the
implementation of the Scheme.
(section 264(2)).
OA appointed by BIFR was
responsible for monitoring
the Scheme
Winding up
of the
Company if
the Scheme
is not
approved by
the
Creditors.
If the Scheme is not approved,
the CA shall file its report with
the Tribunal and then the
Tribunal shall conduct the
proceedings of the winding up
under Chapter XX of the New
Act. (section 265)
Winding up powers are with
BIFR.
Particulars Companies Act, 2013 SICA, 1985
Winding up
of the
Company if
the approved
Scheme fails
to
implement.
• Winding up by the Tribunal if
75% of secured creditors agree
to it. (section 258 (a)).
• Tribunal may modify the terms
of the scheme.
No creditors approval was
required, the OA in case
where the Scheme is not
implementable may seek for
the change in management
(‘’COM”) of the company
and if the COM does not
takes place then winding up
is recommended to the High
Court.
Fund Rehabilitation and Insolvency
Fund. (section 269)
Rehabilitation Fund
Particulars Companies Act, 2013 SICA, 1985
Punishment/
Penalty
(section 267)
Whoever violates the
provisions of chapter XIX,
or;
• makes a false statement, or;
• gives false evidence before the
Tribunal or the Appellate
Tribunal, or;
• attempts to tamper with the
records of reference or appeal
filed under this Act
shall be punishable with
imprisonment up to 7 years and
fine which may extend to Rs. 10
Lacs
No such provision for
cognizance.
Whoever violates the
provisions of this Act
and;
• whoever makes a false
statement, or;
• gives false statement to the
board or the Appellate
Authority
shall be punishable with
imprisonment up to 3 years
and which may be coupled
with fine.
No cognizance by any
court of any offence
mentioned above, except
on a complaint by such
persons.
Challenges-
Revival and
Rehabilitation
Challenges
7/24/2015
Transitional provision
Any appeal, reference or proceedings pending
before BIFR/AAIFR shall stand abated.
Company is allowed to make reference to the
Tribunal within 180 days from the
commencement of the New Act.(section 434)
Overriding powers of SICA over other
Rules/Acts/Statue/Legislation etc., missing in
the New Act.
Protection of interest of the unsecured
creditors.
Challenges
7/24/2015
Reporting under CARO-2015 to continue.
Timelines in Chapter XIX, whether mandatory ordirectory. (Section 422)
Qualification criteria for administrators.
• having special knowledge or experience in mattersrelated to revival and rehabilitation of sick companiesor insolvency for at least 10 years;
• total receipts, from rendering of professional services,not less than 15 lakh rupees in each of the previous3 years according to the audited financial statements;
• free from any professional or other mis-conduct, pastand present, committed under the respective statuteunder which he is governed;
• met the fit and proper person criteria specified bythe Central Government from time to time.
Challenges
7/24/2015
Role of Company Secretaries in the process of
revival and rehabilitation.
• Interim Administrator.
• Company Administrator.
• Advisor to the board.
Jurisdiction under the Companies Act, 1956
Agencies Dealing with
Company Law Matters
State High
Court(s)CLB
Winding up
petitions,
Compromise &
Arrangements,
reduction of
capital,
restoration of
name & appeal
from CLB
Rectification of
registers,
transfer/transmis
sion of shares,
oppression
mismanagement,
compounding of
offences etc.
Offences under
the Old Act
Revival and
rehabilitation of
Sick Companies
Presidency
Magistrate or a
Magistrate of the
first class
BIFR/ AAIFR
National Company Law Tribunal Powers
Pursuant to the New Act coming into force in entirety, NCLT inter-alia shall
have the following powers:
NCLT
Investigation and
compounding
Class Action
Suits
Complaints relating
to refusal to transfer/
of transmission of
shares
Rectification of
Register(s)
Oppression and
Mismanagement
Compromise and
Arrangements
Revival and
Rehabilitation of
Sick Companies
Winding Up
Powers in terms
of the LLP Act,
2008
Corporate Jurisdiction Hierarchy under
the Companies Act, 2013
Company Law
Jurisdiction
Supreme Court
High CourtsNCLAT
Special CourtsNCLT
Offences to be triedSpecified proceedings
under the New Act
BROAD FRAMEWORK OF SICA
Applicability of SICA:
Scheduled industry – any of the industries specified for the time being
in the First Schedule to the Industries (Development and Regulation) Act,
1951.
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