Corporate insolvency(SICA):
When a company becomes unable to pay its debt or any financial liability/obligation when it becomes due to pay, such situation is called corporate insolvency. Corporate insolvency deals with the insolvency of companies which are registered under the Companies Act and not the individual.
Difference between insolvency and bankruptcy
Insolvency is when an individual, corporation, or other organization cannot meet its financial obligations for paying debts as they are due. Whereas Bankruptcy is a determination of insolvency by a court of law with resulting legal orders intended to resolve the insolvency. Bankruptcy is a legal scheme in which an insolvent debtor seeks relief.
Regulation of Corporate insolvency in India
Following laws Governs corporate insolvency in India:
The Companies Act of 1956/2013. The Companies Act governs liquidation of a company in financial distress via: (i) voluntary winding-up; (ii) involuntary winding-up by the courts; or (iii) winding-up under the supervision of court.
- The Sick Industrial Companies (Special Provisions) Act, 1985 (SICA). SICA provides a program for the reconstruction of these companies under the supervision of the Board for Industrial and Financial Reconstruction (BIFR). SICA, however, only applies to “sick” companies in select industries that have been incorporated for at least five years, have at least 50 workers on any day in the preceding 12 months and have a factory license.
- The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act, 2002 (SARFAESIA). SARFAESIA empowers banks or financial institutions with a presence in India or which have been notified by the Government of India to recover on non-performing assets without court intervention. An asset is classified as non-performing if interest or installments of principal due remain unpaid for more than 180 days.
- Companies Act 2013:
1. The Tribunal may appoint an interim administrator or a company administrator from the panel of Company Secretaries, Advocates, CAs, CWAs, etc. maintained by the Central Government.
2. The Tribunal may appoint Provisional Liquidator or the Company Liquidator from a panel maintained by the Central Government consisting of Company Secretaries, Chartered Accountants, Advocates and Cost and Works Accountants.
SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT 1985 “SICA”
Objective:
SICA was enacted for following purposes:
- Revival of sick companies
- Timely detection of sick and potentially sick companies.
- Speedy determination of Preventive, ameliorative and remedial measures.
- Expeditious enforcement of the measures taken.
Applicability
SICA will apply let the line to all the industrial companies which runs industrial undertakings related to activities defined under first schedule to the industries development and Regulation Act 1951. But it does not apply to shipping industry, cooperative societies and trust and small and medium enterprises (SSI).
Meaning of sick industrial companies
Sick industrial company means an industrial company
- which is registered for at least 5 years and;
- At the end of financial year, the accumulated losses are equal to or more than its entire net worth.
Net worth means sum total of paid up capital and free reserves. Free reserve means all reserves credited out of the profits and share premium account but does not include reserves credited out of revaluation of assets, write back of depreciation provisions ,and amalgamation.
Board for Industrial and financial reconstruction (BIFR) & AAIFR (Appellate authority of Industrial and financial reconstruction)
Board is the authority to hear and decide the matters related to sick industrial company. The decision of Board can be taken in appeal before AAIFR ( Appellate authority of Industrial and financial reconstruction). Board shall consist of a chairman and shall have at least 2 and not more than 14 other members which shall be appointed by the central government. AAIFR shall consist of one Chairman and at least three other members which shall be appointed by the government for hearing appeal against the orders of the Board under this Act. Every proceeding before the Board and appellate authority shall be the judicial proceeding. The Chairman and every other members shall hold office for such period not exceeding 5 years and shall be eligible for reappointment. However no person who has attained the age of 65 years shall be appointed as member or chairman of the authorities.
Reference or reporting of sickness to the Board(Sec 15)
Section 15 of the Act deals with reference of sickness to the Board. Reference means reporting the sickness of companies and requesting measures for rehabilitation. When Board of directors of the company is of the opinion that the industrial company has become sick even before the finalisation of audited financial statement of the company then Board of Directors shall make a reference to the Board about the sickness of the company within 60 days of such opinion. Further when duly audited accounts of the company for the financial year is finalized and company become sick industrial company as at the end of such financial year , then Board of Directors shall within 60 days from the date of finalisation of the account, make a reference to the Board for determination of the measures which shall be adopted with respect to the company. such reference can also be made by central or state government, Reserve Bank of India, public or a state financial institution or any other scheduled bank if such government or institution has provided financial assistant or obligation to company. However no reference I’ll be made to the Board if
- financial assets of a company has been acquired by securitization or reconstruction company or
- Banks are Financial Institutions have taken over assets under Sarfaesi Act 2002.
Inquiry by Board:
On receipt of such reference by the Board, the Board may appoint operating agency to make an inquiry to determine whether company has really become sick unit. Operating agency may be Public Financial Institution or state level institution or scheduled bank. Agency shall complete inquiry within 60 days. Board can also appoint the special directors of the company for securing the financial and other interest of the company such directors shall be immune from any prosecutions or liabilities for the acts done in good faith.
Orders by Board:
On completion of inquiry, if Board is satisfied that company has become sick, then then Board may pass following orders:
- give time to the company to make it network exceed accumulated losses within reasonable time if company can revive on its own
- order operating agency to implement Revival e scheme if it is not septic able to make it network exceed the accumulated losses within a reasonable time by the company
- Wind up the company under just and equitable grounds if it is not likely to revive and forward such opinion to concern High Court and operating agency may be appointed as the liquidator.
On receipt of order of preparation of Revival scheme , operating Agencies shall prepare the Revival scheme Within 90 days for financial reconstruction or take over or amalgamation or sell off.
Board shall examine the scheme of Revival and will send the same to the companies and all the concerned parties and also published in newspapers for inviting objection for any modifications in the scheme. Where scheme provide for financial assistance by central and state government public or state financial institution or scheduled bank then such scheme shall be circulated to them for their consent. If such institutions do not refuse for financial assistance within 60 days, then consent shall be deemed to have been obtained. Where scheme provide for amalgamation such scheme shall be approved by the special resolution of the company for vesting of properties and to make such scheme binding on the transferee and parties.
Where scheme provides for financial assistance from Central and state government public or a state financial institution or schedule bank and such institutions refuse to provide any financial assistance then Board may ask for winding of the company and forward its opinion to the High Court Which shall appoint operating agency as liquidator of sick industrial company for the purpose of winding up of sick industrial company.
Immunity from certain legal proceedings contracts etc.(sec 22)
Section 22 of Act provides the immunity to the company from certain legal Action, proceedings, contracts or shareholder resolutions etc. on commencement of inquiry till scheme passed or appeal is preferred. Such legal proceedings can be initiated against the company only with the permission of BIFR OR AAIFR. Such immunity can be granted for a period of 2 years and can be extended upto 7 years. Such immunity shall be immunity from winding up or appointment of receiver, execution of decree against property or suit for recovery of money, suit for enforcement of any security or guarantee. Such immunity does not include criminal proceeding against the company or its directors or officers.
Revival& Rehabilitation of Sick Companies:
Chapter-XIX of the Companies Act, 2013
Distressed or Sick Company revival & rehabilitation related legal provisions in India have been made at par with developed countries under chapter XIX of The Companies Act 2013 section 253 to 269. Earlier Sick Companies ( Special Provisions) Act 1985 was pro Promoters / Directors of the company but now it is Pro Creditors and much aggressive to revive the company.
The very definition of the “Sick Company” has been changed completely. Instead of previous “ net worth erosion” to inability to pay dues to creditors within 30 days of the demand itself would prove that the company has become a sick company. Further now penal provisions are more stringent ranging up to 7 years jail or Rs. 10 Lacks fine or both, including disqualification of such directors to be so appointed in any company in India. Which was missing and delinquent directors were squeezing the resources of the company in their personal favour.
All the activities are time bound at each stage, whether determining the company as a sick company or sanction of revival of company or to wind up sick company all activities have to be completed within the stipulated time frame, including NCLT to deliver its order with the prescribed time.
The Sick Company Revival and Rehabilitation legal provision sunder chapter XIX are as follows:
- Determination of Sickness of Company-As per section-253(1)
Where on demand by the secured creditors representing 50% or more of its outstanding amount of debt, company fail to pay the debt within a period of 30 days from the date of notice of demand, any secured creditor may file an application to tribunal for determination of sickness of the company. - Application for Revival and Rehabilitation-As per Section-254(1)
On determination of a company as a sick company by tribunal, any secured creditor of that company or the company; may make an application to the Tribunal; for the determination of the measures that may be adopted with respect to the revival and rehabilitation of such company. - Exclusion of certain time of stay order in computing period of limitation- As per Section-255, the determining time period for any suit in the name and on behalf of a company, making an application to the Tribunal under sub-section (1) of section 253, for a determination to be declared as a sick company, the period during which the stay order as provided under sub-section (3) of section 253, was applicable shall be excluded.
- Appointment of Interim Administrator
- Committee of Creditors-As per Section-257
- Order of the Tribunal- As per Section-258,
- Appointment of Administrator-As per Section-259
- Duties of Company Administrator-As per Section-260
- Powersof Company Administrator
- Scheme of Revival & Rehabilitation-As per section-261
The company administrator shall prepare or cause to be prepared a scheme of revival and rehabilitation of the sick company after considering the draft scheme filed along with the application under section 254.
Scheme prepared in relation to any sick company may provide for any one or more of the following measures:1. The financial reconstruction of the sick company
2.The proper management of the sick company by any change in, or by taking over, the management of such company The amalgamation of the Sick Company with another company
3. Takeover of the sick company by a solvent company
4.The sale or lease of a part or whole of any asset or business of the sick company
5. The rationalization of managerial personnel, supervisory staff and workmen
6. Repayment or rescheduling or restructuring of the debts or obligations of the sick company to any of its creditors or class of creditors
7. Such other preventive, ameliorative and remedial measures - Sanction of the Scheme -Section-262
- Binding of the Scheme
- Section-263 of the act says, on and from the date of the coming into operation of the sanctioned scheme, the scheme or such provision shall be binding on the sick company, the transferee company & any other company( in case of amalgamation) and also on its shareholders, creditors etc.
- Implementation of the scheme-As per Section-264 of the act,
- Winding up of the company-As per Section-265 of the Companies Act, 2013
If the scheme is not approved by the creditors in the manner specified in sub-section (2) of section 262, the company administrator shall submit a report to the Tribunal within 15 days &; the Tribunal shall order for the winding up of the sick company in accordance with the provisions of Chapter XX. - Power of Tribunal to assess damages against delinquent directors- As per Section-266,
- Punishment for certain offences-Section-267
- Bar of Jurisdiction- As per Section-268
- Rehabilitation and Insolvency Fund