revival and restructuring of sick companies.doc

8/14/2019 REVIVAL AND RESTRUCTURING OF SICK COMPANIES.doc

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REVIVAL AND RESTRUCTURNG OF SICK COMPANIES

1. What do you mean by Sick Industrial Companies under SICKINDUSTRI! C"#$NI%S &S$%CI! $R"'ISI"NS( CT) 1*+, -SIC/

ns0 Sick industrial companyAccording to Section 3(1)(o) of the Sick Industrial Companies (Special Provisions)

Act, 19!, "sick industrial company means an industrial company &bein2 acompany re2istered 3or not less than 3i4e years() 5hich has at the end o3

any 3inancial year accumulated losses e6ual to or e7ceedin2 its entire net5orth.#$planation% &or the removal of dou'ts, it is here' declared that an industrial

compan e$isting immediatel 'efore the commencement of the Sick Industrial

Companies (Special Provisions) Amendment Act, 1993 registered for not less thanfive ears and having at the end of an financial ear accumulated losses eual to or

e$ceeding its entire net *orth, shall 'e deemed to 'e a sick industrial compan+

8. What are the condition precedent 3or declarin2 a company as sickcompany/

ns0 he health of an industrial compan depends upon various factors, *hichinclude, inter alia, the ualit of its -oard of .irectors, efficienc in performing itsduties and functions, effectiveness of its managerial staff, cali're of skilled, semi/

skilled and unskilled *ork force, timel availa'ilit of adeuate funds, ra* materials,

stores, packing material, tools and other consuma'les, read market for semi/finished and finished products of the compan, cordial industrial relations, effective

pu'lic relations, conducive 0overnment policies and other related factors+

henever an industrial compan faces pro'lems *ith regard to an one or more ofthe a'ove factors, *hich the management of the compan is incapa'le of solving,the compan starts sho*ing smptoms of sickness+

$roblems o3 Sick Industrial CompaniesPrior to the glo'alisation and li'erali2ation of Indian econom, it *as o'served that

most of the companies o*ning industrial undertakings *ere facing numerouspro'lems and 'ecoming virtuall sick+ his drove them to the 'rink of closure,

resulting in serious repercussions, 'oth economic and social+he incidence and magnitude of ill effects of sickness and the resultant closure of

industrial companies / such as loss of production, loss of emploment, loss ofrevenue to the Central and State 0overnments and locking up of investi'le funds of

'anks and financial institutions, *as a matter of serious concern to the 0overnment+It *as recogni2ed that in order to full utili2e the productive industrial assets, to

afford ma$imum protection of emploment and optimi2e the use of the funds of'anks and financial institutions, it *ould 'e imperative to revive and reha'ilitate the

potentiall via'le sick industrial companies as uickl as possi'le+ o*ever, themultiplicit and comple$it of la*s and agencies present made the adoption of a co/

ordinated approach in dealing *ith sick industrial companies, difficult+Need 3or le2islationPrevention is 'etter than cure+ 0oing ' this adage, it *as held prudent that timeland advance measures should 'e taken either ' legislation or ' administrative

orders and machiner, to keep a strict vigil on the smptoms of corporate sickness

Net worthNet worth means the sum total of the paid-up capital and freereserves.

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*ith particular reference to such companies as are prone to an kind of corporatesickness, so that preventive and remedial measures can 'e taken 'efore a compan

goes sick+ A need *as therefore felt, to enact in pu'lic interest, a legislation toprovide for timel detection of sickness in industrial companies and for e$peditious

determination ' a 'od of e$perts of the preventive, ameliorative, remedial andother measures that *ould need to 'e adopted *ith respect to such companies and

for enforcement of the measures considered appropriate+It *as in this 'ackground that the Sick Industrial Companies (Special Provisions) Act,19! *as enacted, *hich provided for the esta'lishment of the -oard for Industrial

and &inancial 4econstruction (-I&4) and also its appellate authorit, Appellate

Authorit for Industrial and &inancial 4econstruction (AAI&4)+CUS%S "9 SICKN%SS "9 INDUSTRI! C"#$NI%She sickness of an industrial compan ma result from various causes+ Amongstothers, the follo*ing are the prominent causes of sickness of industrial companies%

Internal Causeshe internal causes of sickness of an industrial compan refer to factors *hich are

related to the functioning of the compan and are *ithin the control of the companitself+

hese factors ma 'e grouped into three 'road headings%

Pro5ect 4elatedPersonnel 4elatedPerformance 4elated

Pro5ect 4elated Causes%6nder/estimation of the pro5ect cost

7on/availa'ilit or inadeuate availa'ilit of critical information having a vital 'earingon the pro5ect

.elaed pro5ect implementation and resultant cost escalationPersonnel 4elated Causes%

Poor ualit of management%#$cessive conservatism

#$cessive complacence

Poor functional controls#$cessive centrali2ation

eak -oardAuthoritarianism

eak *atchdog functions8ack of management depth

ne/man 4ule

-ureaucratic, unplanned and inappropriate management#$cessive Commitment to Policies *hich *orked *ell at one time 'ut are no longer

appropriate+Poor financial:marketing:management control+

;anagement succession pro'lems+Poor inter/personal and inter/departmental coordination, dimensions,

interdepartmental coordination, dissensions, inter/departmental sua''les, *rongorgani2ational polices etc+

Poor industrial relations including e$istence of


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%7ternal Causeshese relate to the environmental and other factors *hich are not *ithin the control

of the given industr or given unit as such+ he include the follo*ing causes%7on/co operative 0overnment policies :price control schemes etc+

4ecession:adverse economic conditionsPo*erful competitors in the market

7on/availa'ilit:shortage of inputs4egional phenomenon including local environmental factorsIndustr/*ise phenomenon

echnological advancements

&reuent and long po*er cuts.elaed financial assistance

he i*ari Committee under the chairmanship of Shri + i*ari in 193 identified thefollo*ing causes of industrial sickness%

Internal CausesPlanning

echnical feasi'ilitInadeuate technical kno*/ho*

8ocational disadvantage

ut dated production process#conomic via'ilitigh cost of inputs

igh -reak/even point6neconomic si2e of pro5ect

6nderestimation of financial reuirements6ndul large investments in fi$ed assets

verestimation of demand+Implementation

Cost overruns resulting from delas in getting licences:sanctions+Inadeuate mo'ilisation of finance+

Production

Production managementInappropriate product/mi$

Poor ualit controlPoor capacit utilisation

igh cost of productionPoor inventor management

Inadeuate maintenance

8ack of timel and adeuate moderni2ation+8a'our management

#$cessivel high *age structureInefficient handling of la'our pro'lems

#$cessive manpo*erPoor la'our productivit

Poor la'our relations+;arketing management

.ependence on a single customer:single productPoor sales reali2ation

.efective pricing polic-ooking of large orders at fi$ed prices in inflationar markets

eak market organisation8ack of market feed'ack and market research+

&inancial management

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Poor resource management&ault costing

oo/li'eral dividend polic0eneral financial indiscipline

.eficienc of fundsSiphoning a*a of funds

vertrading6nfavoura'le gearing or keeping an adverse de't/euit ratio+Administrative management

ver centrali2ation

8ack of professionalism8ack of feed'ack to management (management information sstem)

8ack of adeuate controls8ack of timel diversification

#$cessive e$penditure on 4 > ..ivided loalities (*here the same management has interest in more than one

enterprise)? cases ma occur *here promoters of limited companies *ho also o*nprivate o*nership firms tend to look after the interest of the latter, often at the cost

of the former

.issension *ithin the managementIncompetent management.ishonest management+

#$ternal CausesInfrastructural 'ottlenecks

7on/availa'ilit:irregular suppl of critical ra* materials or other inputsChronic po*er shortage

ransport 'ottlenecks+&inancial 'ottlenecks

7on/availa'ilit of adeuate finance0overnment controls, policies, etc+

0overnment price controls

&iscal dutiesA'rupt changes in 0overnment policies

Procedural delas on the part of the financial:licensing:other controlling or regulatingauthorities ('anks, 4-I, financial institutions, 0overnment departments, licensing

authorities, ;onopolies and 4estrictive rade Practices -oard)+;arket constraints

;arket saturation

4evolutionar technological advances causing product o'solescence+#$traneous factors

7atural calamitiesPolitical situation (domestic as *ell as international)

arSmpathetic strike

;ultiplicit of la'our unions+@Source% he 8a* of Sick Industrial Companies (8a*, Practice and Procedure)?

Second #dition / S+A+ 7aik

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:. Who can appoint special director under sec;


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4ecommend to the ri'unal, on the various steps to 'e taken to

implement the scheme and remove the difficulties therein under

Section BB . (1B)?

Implementation of reha'ilitation scheme, ordered ' ri'unal @Section BB

.(1!)?

Appointment as liuidator in case of *inding up of industrial compan

@Section BB 0 ()? Preparation of detailed inventor and lists of an industrial compan ordered

' ri'unal @Section BB+

,. What are the ob>ecti4es o3 SIC 1*+,/

Ans: !he Sick Industrial "ompanies Special #rovisions$ %ct, &'()SI"%$ is an act *hich makes in public interest, special provisions, *itha vie* to securing timely detection of sick and potentially sickcompanies o*ning industrial undertakings, speedy determination by aBoard of e+perts of the preventive, ameliorative, remedial and othermeasures *hich need to be taken *ith respect to such companies ande+peditious enforcement of measures so determined and for mattersconnected there*ith or incidental theretoPrincipal objectives of SIA:SI"% *as enacted *ith the follo*ing principal ob-ectives.!o evaluate the techno/economic viability of sick industrial companies*ith a vie* either to rehabilitate them, if the public interest sodemanded and their rehabilitation *as possible, or to close themdo*n, if continuing them *ould be impossible!o stop continued drain of public and private resources for the overalleconomy of the country!o protect employment as far as practicable

Supreme court in Namit ! "amani v. !.!. "amani #$%&&' ( S)&* #$%&%' + omp , )%$AI! $%&% S %#$%&%' // omp "as&01S"$ had e+plained the ob-ect of SI"% as a$ affording ma+imumprotection to employment b$ optimising the use of funds and availableproduction assets c$ realising amounts due to banks, institutions,creditors and d$ providing efficient authority consisting of e+perts fore+peditious determination of measures to avoid time consumingprocedures

?. Write short note on Rehabilitation and re4i4al 3unds.

Ans: !ehabilitation and !evival 0und

A !ehabilitation and !evival 0undshall be formed for the purposes ofrehabilitation or revival or protection of assets of a sick industrial company

!he follo*ing shall be credited to the Fund /

all amounts paid under Section 22&B ie as appropriated by

#arliament

any amount given as grants by the "entral 3overnment for the

purposes of this fund

any amount given to the fund from any other source

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any income from investment of the amount in the Fund

amount refunded by the company under Section 22&3

%pplication of Rehabilitation and Revival Fund!he aforesaid Fund *ill be under the control of !ribunal and shall be appliedby the !ribunal for any of the follo*ing purposes as !ribunal considersnecessary/ a$ making interim payment of *orkmen4s dues pending therevival or rehabilitation of the sick industrial company b$ payment of*orkmen4s dues to the *orkmen 5as defined in Section )1' 0$6 of the sickindustrial company or c$ protection of assets of sick industrial company ord$ revival or rehabilitation of sick industrial company

@uestion AD%9 !td. 5as incorporated 5ith a capital o3 Rs.AB crore) promoted by the5ell kno5n 2roup I8td+ 6nfortunatel .#& 8td+ *as incurring heav losses rightfrom incorporation and its accumulated losses as on 31st ;arch, FF3 stood at 4s+9!

crore+ he ma5or finished products of .#& 8td+ *ere the ra* materials of IG 8td+ Asummari2ed position of the financial condition of 'oth these companies is given

'elo* %

(4upees in Crores)8ia'ilities .#& 8td+ IG 8td+Share capital DF 3B

4eserves / 1D3ther lia'ilities !F /

1F FDAssets

otal assets ! FD8osses 9! /

1F FDssumin2 that the pro4isions o3 the Sick Industrial Companies &Special$ro4isions( ct) 1*+, are not applicable) ad4ise the mana2ement o3 I

!td.) the most ta7 e33icient and company la5 3riendly method o3reconstruction o3 the company 5hich 5ould be in the lon2 term interests o3both the companies I !td. and D%9 !td.) the 3inancial institutions)shareholders and employees in4ol4ed.

&+ marks(Ans*er B(a)

&rom the facts given in the uestion, it is clear that the complete paid/up capital of

.#& 8td+ has eroded+ he ideal solution *ould 'e to dissolve .#& 8td+, as even itsassets are not enough to pa its creditors+ -ut since it is stated to 'elong to a *ell

kno*n group IG 8td+, a scheme of reconstruction has to 'e *orked *hich *ill help.#& 8td+, to tide over the present difficulties and repa the loans over a rescheduled

time period+ his *ould 'e *orka'le as it is also given in the uestion that the ma5orfinished products of .#& 8td+ *ere the ra* materials of IG 8td+ so a proper scheme

of arrangement appears to 'e the savior of all concerned i+e+ shareholders,institutions, suppliers, emploees etc+

o make the reconstruction proposal via'le to 'oth the transferor and transferee, itis necessar first to *rite do*n the capital of .#& 8td+, ' follo*ing the process of

capital reduction 'ut under the scheme of arrangement and not under section 1FF+hen a reverse merger ma 'e resorted to since in a reverse merger the loss making

compan is the transferee compan into *hich the profit making compan merges+he name of the loss making compan can thereafter 'e changed to that of the profit

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making compan to protect 'rand euit of profit making compan+ Such anarrangement ma 'e 'eneficial on the follo*ing grounds %

As the ra* materials of the profit making compan are the finished products of theloss making compan, it *ould 'e for*ard integration to .#& 8td+

Pooling of resources *ould afford stronger resilience to *ithstand competition+com'ined operations *ould result in economies of scale, reduction of costs and

integrated operations+integration of all activities leading to increased professionalism, streamlinedmanagement, si2ea'le reduction in management costs and avoidance of duplication

in management set/up

he creditors *ho *ould other*ise have lost out *ould agree for a moratorium for acouple of ears and then *ould 'e a'le to recover all their outstandings+

#mploees of the loss making compan *ho *ould have lost their 5o's *ould findrene*ed enthusiasm for *ork since the compan *ould not close do*n+

@uestion +@. =alance sheet o3 =C !td. as on :1st #arch) 8BB< reads as 3ollo5s 0!iabilities &Rs. in EBBB( ssets &Rs. in EBBB(Share capital 8)8?)BBB 9i7ed assetsReser4e :B)BBB &net block( ?)1,)BBBSecured loans ,)1A)+BB

Current assets 1)?*)+BBCurrent liabilities 8)+B)BBB

In4estments 1),BB$ro3it and loss aFc 8)??)+*B#isc. e7penses &to the e7tent not 5ritten o33( ?1B

1B),:)+BB 1B),:)+BBNet 5orth o3 =C !td. has completely eroded as on :1st #arch) 8BB


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had sufficient reasons even before such finali9ation to form the opinionthat the company had become a sick industrial company, the Board of:irectors, shall *ithin si+ty days, after it has formed such opinion,make a reference to the Board for the determination of the measures*hich shall be adopted *ith respect to company !he accumulated

losses in this case are Rs1,


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i2h Court 5ithin the meanin2 o3 Section 8B o3 SICA read *ith Section1F of the Companies Act, 19!H+ Accordingl, the igh Court at Indore did not

possess an territorial 5urisdiction to entertain, receive and:or decide thereference sent ' -I&4 in respect of the compan+ So, the 4egistr *asdirected to return all papers received ' them from the -I&4 in respect of thecompan to the office of -I&4 for 'eing for*arded to olkata igh Court,

'eing the concerned igh Court+

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