SICA

In the Shadows of SICA

In India, SICA, Sick Industrial Companies (Special Provisions) Act, 1985 is the relevant Act relating to revival and rehabilitation of ‘sick Industrial companies’. Enacted in 1985, the Act is applicable to the whole of India. For a company to come within the purview of SICA, it must meet the following criteria viz (i) it should be a company engaged in any scheduled industry (i.e. any industry specified in the First Schedule to Industries (Development and Regulation) Act, 1951) and (ii) it should be sick.
Section 3(1)(o) defines a “sick industrial company” as 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 entire net worth. Thus, the concept of ‘sickness’ is that at the end of a given financial year, the company should have accumulated losses equal to or exceeding its entire net worth. A ‘potentially sick industrial company’ is one wherein accumulated losses of an industrial company at the end of any financial year, have resulted in erosion of fifty percent or more of its peak net worth during the immediately preceding four financial years. An interesting inquiry is what is the concept of ‘net worth’ within the meaning of the Act. According to section 3(1)(ga), inserted by the Sick Industrial Companies (Special Provisions) Amendment Act, 1993, “net worth” means the sum total of the paid-up capital and free reserves. And for the purpose of the clause, “free reserve” have been referred to include all reserves credited out of the profits and share premium account but does not include reserves credited out of re-evaluation of assets, write back of depreciation provisions and amalgamations.
Schedule Industry basically includes metallurgical industries, telecommunication, transportation, chemicals and textiles but does not include financial and software related industries. The concept of Scheduled Industries and the use/ abuse of the same in the License Raj has been discussed at by the world renowned economist Arvind Panagariya in his book, India: the emerging giant.
A company may be sick or potentially sick. Once a company becomes sick, the board of directors should make a reference to Board for Industrial and Financial Reconstruction (“BIFR”). Once “BIFR” initiates an enquiry, “automatic stay” immediately comes into force. One practical implication of ‘automatic stay’ is that any payment to be made to creditors is stayed. It has often been seen that companies have abused the provisions of SICA to come within the purview of sickness to abuse provisions like ‘automatic stay’. Another criticism levied on SICA is that sickness is related to the concept of erosion of net wealth and not the ‘inability to pay debts’. Thus, the stage if referral has been a subject matter of criticism. It is often seen that the net wealth is eroded to such an extent that it is too late to try resuscitating life into the dying firm. Accordingly, statistics relating to SICA are not all that promising since in a great majority of cases winding up was recommended.
Once the matter has been referred to BIFR, it may direct any “operating agency” to prepare a scheme for the rehabilitation of the company. An “operating agency” has been defined u/s 3(1)(i) as any public financial institution, State level institution, Scheduled bank or any other person as may be specified by general or special order as its agency by the Board.
Normally either of three courses are resorted to under the scheme: Financial reconstruction of the company, proper management of the company and amalgamation of the company with another company. Winding-up though in the scheme of things is usually seen as a last resort, when it becomes clear beyond all hope that the sick company has no chances of revival.
Chapter XIX of the Companies Bill, 2008 talks about revival and rehabilitation of Sick Companies and proposes to introduce laudatory changes in the way ‘sickness’ is determined at present. Basic highlights of the proposed amendment are that the criteria of ‘sickness’ to be related to inability to pay debts due to secured creditors representing 50% or more of the outstanding debt. Unlike present wherein the application for sickness is to be filed by the Board of the company, under the proposed Bill, the application may be filed either by the creditor of the company. Furthermore, whether a company can be revived or wound up, should be decided by requisite majority of creditors. Interestingly, the provision of automatic stay of proceedings, which had been a thorny issue for years, too has been proposed to be done away with.
The Winding up of a company are dealt with in Part VII of the Companies Act, 1956. Winding up may be carried out on an application before the High Court by both Secured as well as unsecured creditors. Thus, whereas a company may be declared sick, only on a an application by its Board; winding up proceedings may be initiated on an application by its creditors or by its members.
An indicative list of grounds have been provided under the Act to request winding up of a company. Important reason amongst others include inability of a company to pay debts. Presumption for inability to pay debts may also be made by the Court for instance in case a company is unable to pay to its creditor for three weeks after he raises a demand for Rs 500 and more. As in the case of SICA, even in case of winding up, an ‘automatic stay’ comes into operation for staying of proceedings against the company. As for the procedure for winding up, prior to an order of winding up being passed by the court an application has to be made to the concerned Court for requesting for initiating proceedings against the Company.
Members may request for winding up of the operations by declaring that the company has gone insolvent. Alternatively, Creditors may also declare a company has gone insolvent and request for winding up of the same. In such a case, power to appoint liquidators rests primarily with the creditors. In both these methods of voluntary winding up of a company, automatic stay per se does not arise. An application has to specifically made to the concerned Court for exercise of power to stay proceedings against the Company.
While making payments, on winding-up its operations, a company prioritizes in the following order. The workmen are the first to get their dues, followed by the secured creditors; revenues, taxes etc. due from the company and then other salaries and dues of the employees. Unsecured creditors are next in the list and finally, if any surplus are left, the shareholders get to share and distribute the same amongst themselves.
Chapter V of the Companies Act, 1956 deals with Arbitration, Compromises, Arrangements and Reconstructions. Section 391 to 394 of the Companies Act, 1956 are the relevant provisions for entering into compromise and settlement with creditors and amalgamation or merger with other companies. Section 396 empowers Central Government to provide for amalgamation of companies in national interest. Satyam is an a noteworthy case in this context, wherein the Government even went on to amend the provisions of the Takeover Code to smoothen the bumpy road to acquisition.