Revival of sick industries

Revival of sick industries

The Sick Industrial Companies Act (SICA) was a key piece of legislation dealing with the issue of rampant industrial sickness in India. SICA was enacted in India to detect sick or potentially sick companies owning industrial undertakings, and their revival, if possible, or their closure, if not. This measure was taken to release investment locked up in sick companies for productive use elsewhere.

SICA identified a number of internal and external factors responsible for this epidemic. Internal factors within the organizations included mismanagement, overestimation of demand, wrong location, poor project implementation, unwarranted expansion, personal extravagance, failure to modernize and poor labor-management relationships. External factors included an energy crisis, raw materials shortage, infrastructure bottlenecks, inadequate credit facilities, technological changes and global market forces.

Widespread industrial sickness affects the economy in a number of ways, such as loss of government revenue, tying up scarce resources in sick units, increasing non-performing assets held by banks and financial institutions, increasing unemployment, loss of production and poor productivity. SICA was implemented to rectify these adverse socio-economic consequences.

Revival and Rehabilitation of sick companies under new act 2013

Chapter XIX of the 2013 Act lays down the provisions for the revival and rehabilitation of sick companies.  The chapter describes the circumstances which determine the declaration of a company as a sick company, and also includes the rehabilitation process of the same. Although it aims to provide comprehensive provisions for the revival and rehabilitation of sick companies, the fact that several provisions such as particulars, documents as well as content of the draft scheme in respect of application for revival and rehabilitation, etc. have been left to substantive enactment, leaves scope for interpretation.

The coverage of Sick Industrial Companies  Act, 1985 (SICA) is limited to only industrial companies, while the 2013 Act covers the revival and rehabilitation of all companies, irrespective of their sector.  The determination of whether a company is sick, would no longer be based on a situation where accumulated losses exceed the net worth. Rather it would be determined on the basis whether the company is able to pay its debts. In other words, the determining factor of a sick company has now been shifted to the secured  creditors or  banks and financial institutions with regard  to the assessment of a company as a sick company.  The 2013 Act does not recognise the role of all  stakeholders in the revival and rehabilitation of a sick company,  and provisions predominantly revolve around secured  creditors. The  fact that the 2013 Act recognises  the presence of unsecured creditors, is felt only at the time of the approval  of the scheme of revival and rehabilitation. In accordance with the requirement of section 253 of the 2013.

Overview of the process

  • In response  to the application made by either the secured  creditor  or by the company itself, if the Tribunal is satisfied that a company has become a sick company,  it shall give time to the company to settle its outstanding debts if Tribunal believes that it is practical  for the company to make the repayment of its debts within a reasonable period of time.
  • Once a company is assessed to be a sick company , an application could be made to the Tribunal under section 254 of the 2013     Act for the determination of the measures that may be adopted with respect to the revival and rehabilitation of the  identified sick company either by a secured  creditor  of that company or by the company itself. The application thus made must  be accompanied by audited financial statements of the company relating to the immediately preceding financial year, a draft scheme of revival and rehabilitation of the company,  and with such other document as may be prescribed.
  • Subsequent to the receipt of the application, for the purpose of revival and rehabilitation, the Tribunal, not later than seven would be required to fix a date for hearing and would be appointing an interim  administrator under  Section 256 of 2013 Act to convene  a meeting  of creditors of the company in accordance with the provisions of section 257 of the 2013 Act. In certain circumstances, the Tribunal may appoint  an interim  administrator as the company administrator to perform such functions as the Tribunal may direct.
  • The scheme thus prepared, will need to be approved by the secured  and unsecured creditors representing three-fourth and one-fourth of the total representation in amounts outstanding respectively, before submission to the Tribunal for sanctioning the scheme pursuant to the requirement of section 262 of the 2013 Act. The Tribunal, after examining the scheme will give  its approval  with or without any modification. The scheme, thus approved will be communicated to the sick company and the company administrator, and in the case of amalgamation, also to any other company concerned.
  • The sanction accorded by the Tribunal  will be construed as conclusive evidence that all the requirements of the scheme relating to the reconstruction or amalgamation or any other measure specified therein have been complied with. A copy of the sanctioned scheme will be filed with the ROC by the sick company within a period of 30  days from the date of its receipt.

Companies Act 2013 – Mergers and Acquisitions 2014

The 2013 Act features some new provisions in the area of mergers and acquisitions, apart from making certain changes from the existing provisions. While the changes are aimed at simplifying and rationalising the procedures involved, the new provisions are also aimed at ensuring higher accountability for the company and majority shareholders and increasing flexibility for corporates.

The section dealing with compromises and arrangements, deals comprehensively with all forms of compromises as well as arrangements, and extends to the reduction of share capital, buy-back, takeovers and corporate debt restructuring as well. Another positive inclusion within  this section is that  objection to any compromise or arrangement can now be made only by persons holding not less than 10% of share holding or having an outstanding debt amounting to not less than 5% of the total outstanding debt as per the latest audited financial statements.

Currently, under the 1956 Act, , there is no mandate requiring companies to ensure compliance with accounting standards or generally accepted accounting principles while proposing the accounting treatment in a scheme.  However, listed companies are required to ensure such compliance as the Equity Listing Agreement mandates such companies to obtain an auditor’s certificate regarding appropriateness of the accounting treatment proposed in the scheme of arrangement. The 2013 Act requires all companies undertaking any compromise or arrangement to obtain an auditor’s certificate (section 230 and 232 of the 2013 Act). This requirement will help in streamlining the varied practices as well as ensuring appropriate accounting treatment. However, another aspect that is yet to be addressed is that the applicable notified accounting standards in India, currently, address only amalgamations and not any other form of restructuring arrangements.

The current procedural requirements in case of a merger and acquisition in any form are quite cumbersome and complex. There are no exemptions even in the case of mergers between a company and its wholly owned subsidiaries. The 2013 Act now introduces simplification of procedures in two areas, firstly, for holding wholly owned subsidiaries and secondly, for arrangements between small companies (section 233 of the 2013 Act). Small companies is a new category of companies, introduced within  the 2013 Act, with defined capital and turnover thresholds, which has been given certain benefits, including simplified procedures.

The 1956 Act, allows the merger of a foreign company with an Indian company, but does not allow the reverse situation of merger of an Indian company with a foreign company. The 2013 Act now allows this flexibility, with a rider that any such mergers can be effected only with respect to companies incorporated within  specific countries, the names of which will be notified by the central government. With prior approval of the central government, companies are now allowed to pay the consideration for such mergers either in cash or in depository receipts or partly in cash and partly in depository receipts as agreed upon in the scheme of arrangement. (section 234 of the 2013 Act). These new provisions can be greatly beneficial to Indian companies which have a global presence by providing them structuring options which do not exist currently.

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