Sick Industrial Companies (Special Provisions) Act

1 There is general, though erroneous, belief that SICA has been repealed.  It is true that Act to repeal SICA has been passed by Parliament in December 2003. However, so far (December 2007), the SICA repealing Act and Companies (Second Amendment) Act have not been made effective. NCLT and also has not been constituted. Thus, SICA is still in force.

Loss of relevance of SICA – Even if SICA has not been repealed, its significance has been lost due to ‘Securitisation & Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002’ made effective on 21-6-2002 Under this Act, Banks can bypass all Court channels and take possession of assets and sale them, instead of going through torturous route of SICA or even Debt Recovery Tribunals under Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI Act).

Purpose of SICA - Preamble to SICA states that the Act is passed to make special provisions for (a) securing timely detection of sick and potentially sick companies owning industrial undertakings (b) speedy determination by a Board of experts of the preventive, ameliorative, remedial and other measures which need be taken in respect of such companies (c) expeditious enforcement of the measures so determined and (d) matters connected therewith or incidental thereto.

Applicability of and Coverage of SICA - The Act extends to whole of India. The Act applies to 'Industrial Undertakings' as defined in section 3(1)(f), which states that the 'industrial undertaking means any industrial undertaking pertaining to industry listed in schedule to Industries (Development and Regulation) Act. This schedule covers practically all industries and hence, the Act in reality applies to all industries, except shipping industry. The Act applies to Government as well as private undertakings. However, the Act does not apply to cooperative societies and units owned by a trust.

The SICA does not apply to small scale industries (SSI).

SICA has overriding effect - Provisions of SICA have overriding effect over provisions contained in all other laws, memorandum and article of company and any other instrument, except provisions of Foreign Exchange Regulation Act (FERA) and Urban Land (Ceiling and Regulation) Act (ULC) [section 32(1) of SICA].

1-1 What is a 'Sick Industrial Company'

Section 3(1)(o) of SICA specifies three conditions : (a) It should be an industrial company (b) It should be registered for at least five years - A company usually makes losses in initial years and hence, initial losses do not mean that the industrial company is sick. (c) At the end of financial year, accumulated losses should be equal to or more than its entire net worth.

Net worth as per SICA - As per section 3(1)(ga), net worth means sum total of paid-up capital and free reserves. Free reserves means all reserves credited out of the profits and share premium account. However, 'net worth' does not include (a) reserves credited out of re-evaluation of assets (b) write back of depreciation provisions and (c) reserves credited out of amalgamation. The definition is significant as precisely these were the ways of increasing 'reserves' so that the net worth will be more than accumulated losses and the company will remain out of clutches of SICA.

1-2 Authorities under SICA and their functioning

The Act envisages formation of 'Board for Industrial and Financial Reconstruction' (BIFR) (Board for short) to hear and decide the matters in relation to sick industrial companies. Appeal against order of Board can be made to 'Appellate Authority for Industrial and Financial reconstruction' (called 'Appellate Authority').

Office of BIFR is situated at 21/22 floor, Jawahar Vyapar Bhavan, 1, Tolstoy Marg, New Delhi - 110 001. (Tel : 331 5890. Fax - 3310207).

Benches of Board and AAIFR - The Board and Appellate Authority will hear the matters by forming benches. The jurisdiction, powers, authority of the Board or Appellate Authority may be exercised by benches which shall be constituted by the chairman.

2 Procedure to be followed in case of sick industrial company

When an industrial Company becomes sick, it should make reference to Board (Board of Industrial and Financial Reconstruction - BIFR). The Board will make enquiry and decide if the Company is likely to come out of sickness. Board will appoint an 'operating agency' to prepare a revival scheme for rehabilitation of the Company. The scheme will be sanctioned by Board after inviting objections.

Reference to BIFR - Whether a Company has become sick can be decided only after accounts are finalised and audited. After the accounts are finalised, Board of Directors of the sick industrial Company must make a reference to BIFR within 60 days after finalisation of accounts. If Board of Directors are of the opinion that the Company is a sick industrial company, Board of Director can make a reference even before finalisation of accounts. [section 15(1) of SICA]. The reference is for determination of measures which shall be adopted with respect to the Company.

The reference can also be made by Central Government, Reserve Bank, State Government, Public Financial Institution, State level Financial Institution or any scheduled bank. [section 15(2) of SICA].

Reporting by auditor as per CARO - As per Companies (Auditor’s Report) Order 2003 (CARO), Auditor, in his audit report, is required to indicate whether, in case of a company which has been registered for a period not less than five years, its accumulated losses at the end of the financial year are  not less than fifty per cent of its net worth and whether it has incurred cash losses in such financial year and in the financial year immediately preceding such financial year also.

Procedure for making reference - BIFR Regulations have prescribed forms for making a reference. These are : Form A : reference by non-Government industrial company; Form AA : reference by a Government company.

Inquiry by Bench of Board - The Bench of Board (BIFR) will make enquiry after a reference is received as above. Explanation to section 16(3) clarifies that enquiry is deemed to have commenced as soon as reference is received by BIFR. The enquiry is for determining whether a company in reference has really become a sick unit. Such enquiry can be made on basis of reference received under section 15 or on the basis of information received about the company or from its own knowledge [section 16(1)]. The Bench of BIFR notifies date of hearing and then it will start analysis of sickness. Making enquiry directly by BIFR is not possible and hence, the Board is authorised to appoint an 'Operating Agency' to make enquiry and submit report to the Board to expedite the enquiry [section 16(2)]. The Board or operating agency should complete enquiry within 60 days.

Operating Agency - Section 3(1)(i) states that 'operating agency' means any of the following : (a) Public Financial Institutions (b) State level Institutions. (c) Scheduled bank (d) Any other person as may be specified by general or special order of Board (i.e. BIFR)

Procedure after Inquiry - After considering the enquiry, the Board (BIFR) shall first decide whether the company has become a 'sick industrial company'. If BIFR comes to conclusion that it is not a sick industrial company, the matter is closed. If Board is satisfied that it is a sick industrial company, it will consider all relevant facts and factors. It has to decide (a) whether Company can revive on its own (b) whether company can revive after implementing a scheme for revival (c) whether company is not likely to revive and whether the company may be wound up.

Suspension of legal proceedings, contracts etc.

2-1 In respect of any industrial company, where (a) enquiry under section 16 is pending or (b) any scheme under section 17 is under preparation or consideration or (c) a sanctioned scheme is under implementation or (d) Appeal has been filed against order of BIFR to Appellate Authority, the industrial company enjoys immunities from some legal actions and enforcement of some contracts and resolutions of shareholders can be stayed.

It may be noted that as per Explanation to section 16(3) of SICA, an enquiry is deemed to have commenced upon receipt of any reference or information by BIFR or even upon its own knowledge reduced to writing. Thus, the protection starts as soon as reference is received by BIFR, even before formal enquiry starts. The requirement is only that reference should be received by the Board. It may or may not have been registered by Registrar of BIFR.

Immunity from legal actions against Company - As per section 22(1) of SICA, suit in respect of following does not lie in any court of law, or if already instituted, it remains stayed.

(a) Proceeding for winding up of the company or (b) proceeding for execution of decree against property of the company (c) appointment of receiver in respect of property (d) suit for recovery of money or (e) suit for enforcement of any security against the company or (f) suit for enforcement of any guarantee in respect of loans or advance granted to the industrial company.

These legal proceedings can start only with permission of Board or appellate authority [section 22(1) of SICA]. The protection is extended to guarantors who have guaranteed the loans given to the company.

3 Potentially sick companies

Sick companies are those whose net worth is less than accumulated losses. This does not happen suddenly, but over a few years. It was felt that early detection of symptoms of sickness will help in taking action before it is too late. It is, therefore, provided that potentially sick industrial undertakings also should report the matter to BIFR so that early action can be taken, if warranted. As is known, prevention is better than cure. Chances of recovery are high if detection of disease is early.

As per section 23(1) of SICA, potentially sick industrial company is one whose accumulated losses at the end of any financial year have resulted in erosion of 50% or more of its peak net worth during the immediately preceding four financial years. e.g., assume that net worth of a company was as follows : 31-3-88 : Rs. 250 lakhs; 31-3-89 : Rs. 220 lakhs; 31-3-90 : Rs. 210 lakhs; 31-3-91 : Rs. 170 lakhs; 31-3-92 : Rs. 160 lakhs; 31-3-93 : Rs. 130 lakhs. As per balance sheet of company, accumulated losses as per balance sheet as on 31-3-93 were Rs. 118 lakhs. Then, peak net worth i.e. maximum net worth during preceding four years was Rs. 220 lakhs. Accumulated losses are more than 110 lakhs and hence it is a potentially sick company. Note that net worth was Rs. 250 lakhs on 31-3-1988, but that was 5th preceding year and hence cannot be considered.

Steps to be taken by potentially sick company - Whether a company has become 'potentially sick company' can be known only after finalisation of duly audited accounts. As per section 3(1)(da) of SICA, 'date of finalisation of duly audited accounts’ means the date when audited accounts are adopted at the Annual General Meeting of the company. After such AGM, the potentially sick company should take following steps : (a) Within 60 days after finalisation of accounts, i.e. within 60 days after AGM, the company should report the fact of such erosion to BIFR. It should also hold a general meeting of the share-holders of company within 60 days. (b) The Board of Directors of the potentially sick company should report to members about such erosion and causes for such erosion. Such report should be sent to members at least 21 days before the general meeting. (c) At the general meeting, any director of the Company appointed by shareholders can be removed by an ordinary resolution and another director can be appointed in his place [section 23(1)(c) of SICA]. Director nominated by financial institutions or collaborators cannot be removed under this section. The director so removed is not entitled for any compensation or damages for termination of his appointment as director [section 23(2)].

Procedure for making a report - The report in case the company is a ‘potentially sick company' should be made by company in form C prescribed under BIFR Regulations. In case of Government companies, prescribed form is form CC.

Proceedings by the Board in case of potentially sick company - The BIFR will make enquiry as it may deem fit and will have to form an opinion whether the industrial company is likely to make its net worth exceed its accumulated losses within a reasonable time while meeting all its financial obligations, and whether the company is likely to become viable in future. If Board is of the opinion that the company is not likely to make its net worth exceed the accumulated losses, meet all financial obligations and is not likely to become viable in future, the BIFR will ask an 'operating agency' (Financial Institution, Bank etc.) to make a report on matters as may be specified in the order [section 23A(3) of SICA].