sica formation

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THE CHARTERED ACCOUNTANT MARCH 2004993

IINNTTRROODDUUCCTTIIOONNick Industrial Companies (SpecialProvisions) Act, 1985, as indicated by itstitle and preamble, was a special legisla-tion enacted in public interest with thetwin objects of

➢ securing the timely detection of sick and potentiallysick companies

➢ speedy determination and enforcement of remedialmeasures i.r.o. such companies.

SICA was basically and predominantly a remedialand ameliorative, in so far as it empowered a quasi judi-cial body-Board for Industrial and FinancialReconstruction (BIFR), to take appropriate measuresfor revival and rehabilitation of potentially sick industrialundertakings and for liquidation of non-viable compa-nies.

FFAAIILLUURREE OOFF SSIICCAA,, 11998855SICA, a well conceived concept, proved to be a

major failure. The regulatory mechanism of SICA waseffective only to a limited extent. Some companies per-ceived SICA as an official exit route. It not only savedthem from the harsh legal proceedings but also gaveaccess to various relief and concessions from the finan-cial institutions. Section 22 of SICA created havoc in thebanking sector and the quantum of non-performingassets increased at an alarming rate.

SSIICCKK IINNDDUUSSTTRRIIAALL CCOOMMPPAANNIIEESS ((SSPPEECCIIAALLPPRROOVVIISSIIOONNSS)) RREEPPEEAALL AACCTT,, 22000033

SICA 1985 after being amended twice, first in1991and later in 1998, was repealed and replaced by SickIndustrial Companies (Special Provisions) Repeal Act,2003. The work of revival and rehabilitation wasentrusted to National Company Law Tribunal (NCLT)constituted under the Companies Act, 1956. Many pro-visions of SICA have been incorporated in Chapter VI A

◆ SICA 1985 was a special legislationenacted in public interest with the twinobjects of securing the timely detectionof sick and potentially sick companiesand speedy determination andenforcement of remedial measures.But some companies perceived SICA asan official exit route, thereby resultinginto losses to creditors and increasedNPA’s in the banking sector SICA, 1985,was repealed by sick industrial compa-nies (special provisions) Repeal Act,

2003. Many processions of SICA havebeen incorporated in chapter VIA(Section 424A-424L) is a considerablydiluted form. The article below is a sec-tion wise Comparison between old pro-visions of SICA, 1985 and new provi-sions in Companies Act, 1956 withexplanatory remarks on it, which indi-cates that the new Act has made anattempt to remove the bottlenecks andcurb the practice of turning an opera-tionally fit company into a sick unit.

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The author is members of the Institute. The views expressed herein

are the personal views of the author and do not necessarily

represent the views of the Institute.

The Provisions ofSICA & Companies ActPurnima Mishra

(Section 424A-424L) in a considerably diluted form. Any appeal against the order of the NCLT will now be made tothe NCLAT instead of Appellate Authority for industrial and financial reconstruction.

The basic premise of the provisions incorporated in Chapter VI A of the Companies Act is to plug the loopholesin the erstwhile SICA. The aim not only being to combat industrial sickness but also to reduce the same by ensuringthat companies do not view declaration of sickness as an escapist route from legal provisions after the project failureand gaining access of various benefits\ concessions from the financial institutions.

AAPPPPLLIICCAABBIILLIITTYYThis Act is applicable only to industrial companies. No change in the definition of “industrial company”.

“Company” too shall the have the same meaning, as defined u\s 3 (1)(i) of the Companies Act, 1956.

Major Changes

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Section no. Provision in SICA Provisions incorporatedin the Companies Act

Remarks

2 The Act was for giving effectto the policy of the Statetowards securing the princi-ples specified in clauses (b) &(c) of article 39 of theConstitution.

No corresponding protec-tion under the Act.

The earlier provision was intended toavoid possible challenge to constitu-tional validity of SICA. However, thenon-inclusion of similar declarationunder the Act does not provide insula-tion from challenges under article 14 &19 in view of article 31C.

3(1) (da) Date of finalisation of dulyaudited accounts means thedate on which the auditedaccounts of the company areadopted at the annual gen-eral meeting of the company

Omitted Making of reference has been practi-cally de-linked from the finalisation ofaccounts.

3(1) (ga) Net worth means sum totalof paid up capital & freereserves

Net worth means sum totalof paid up capital & freereserves less of provisionsand expenses as may beprescribed - 2(29A)

Earlier companies were not deductingprovisions & expenses for computingnet worth. Similarly, no provisions weremade by the company even when suchprovisions were required to be madeunder the Accounting Standards.

Now hopefully this loophole shall beplugged. If the expenses are shown inthe balance sheet as assets and provi-sion (required but not made inaccounts) are deducted, the net worth,therefore, gets considerably reduced,and hence a sick industrial company canbe detected much sooner.

Note: Department of Company Affairs, vide letter no.4/28/8/-CL-X dated 2.9.1981, has clarified that accumulated losses shall be

arrived at only after calculating un-provided depreciation.


3(1) (i) Operating agencymeans public finan-cial institution, Statelevel institution,scheduled bank orany other person asmay be specified bygeneral or specialorder as its agencyby the Board.

Operating agency is group ofexperts consisting of persons hav-ing special knowledge in banking& industry in which sick indus-trial company is engaged andincludes public financial institution,State level institution, scheduledbank or any other any other person asmay be specified by general or specialorder as its agency by the Board

The purview of the definition has beenenlarged to include experts from thefield of banking and finance as well.This will enable the NCLT to providean effective revival scheme drafted bythe experts in banking and industry toassist the sick company in rehabilitation

3(1)(o) Sick industrial com-pany means anindustrial company(being registered fornot less than 5years) which has atthe end of the anyfinancial year accu-mulated lossesequal to or exceed-ing its entire networth.

Sick industrial company means anindustrial company, which has at theend of any financial year: 2(46AA)

● accumulated losses exceeding50% of average net worth dur-ing 4 years; or

● has failed to repay debts to itscreditor(s) in 3 consecutivequarters on demand made inwriting for such repayment.

The impact of this considerably tight mod-ification can be summarized as under:i. No moratorium period. The holi-

day period of 5 years has beendeleted.

ii. Accumulated losses should exceed50% of the average net worth dur-ing the last 4 years.

iii. Inability to repay its creditors for 3consecutive quarters on demandmade by them in writing indicatesweak liquidity status of the com-pany, hence potentially sick.

iv. Any one of the two conditions is suf-ficient to make the company sick.

4 to 14 Constitution andprocedures of theBIFR and AppellateAuthority.

Omitted BIFR and Appellate Authority replacedby NCLT and NCLAT respectively.

15Reference to theBoard

Sec 424A is parallel to Sec 15 ofSICA. Now the company isrequired to submit a scheme ofrevival & rehabilitation at thetime of making reference to theNCLT.

Such reference has to be madewithin:● 180 days after the Board of

Directors came to know about ● 60 days of final adoption of

accounts.

Further, it is also required to furnisha certificate from auditor on thepanel approved by NCLT givingreasons for such reference.

The responsibility for preparation ofrevival & rehabilitation scheme hasnow been casted on the company mak-ing the reference to NCLT. Thus, it isno longer the duty of the banks\finan-cial institutions to nurse a sick baby.

Thus adoption or even preparation ofaccounts is not the basic criteria.Reference has to be made even whenbanks\ Financial institutions take overthe assets under Securitisation &Reconstruction of Financial Assets,Enforcement & Security Act, 2002.

This is a new provision. Auditor’s cer-tificate adds to the authenticity of suchreference. The auditor has on the panelapproved by NCLT in this regards.

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Note 1: Earlier BIFR was required to pass the final orders within 60 days from the commencement of inquiry. Now,first the operating agency shall submit its report to NCLT within 21 days (extendable upto 40 days by the Tribunal).The Tribunal shall conclude its inquiry within 60 days from the commencement of the inquiry, extendable upto 90days by the Tribunal for the reasons to be recorded in writing.

Note 2: No change in the provisions relating to the appointment of special directors. However, now special directorwill submit report to Tribunal within 60 days. He shall have the same powers as that of a director of a company, butshall not retire by rotation or be liable for prosecution etc.

16 Inquiry into the work-ing of the sick indus-trial company by theBoard. For expedi-tious disposal of thecase the matter couldbe referred to operat-ing agency by an orderof the Board. Theagency was requiredto furnish a report tothe Board on comple-tion of its inquiry intothe matter.Further, Board mayappoint one ormore person to bethe special direc-tor\s to the com-pany to safeguard-ing the financial andother interests ofthe company or inpublic interest.

Sec 424A(5) empowers NCLT toexamine as preliminary issuewhether the company is a sick indus-trial company u\s 2(46AA).

Thereafter, only in cases whereNCLT may consider necessary, for-ward the matter for inquiry to oper-ating agency.

Thus even before examining the viabil-ity of the scheme of revival proposed bythe company, NCLT can check the gen-uineness of the reference made to it.

Thus, inquiry by operating agency willonly be to enable NCLT to decide theviability of the scheme and to assesswhether the company has the ability torevive on its own. Else it would directthe preparation of scheme u\s 424D.

424A(5) provides that NCLT hasto examine, as preliminary issue,whether the company is a sickindustrial company u\s 2(46AA)even before considering the via-bility of the scheme of revival &rehabilitation.

Principal jurisdictional provision infavour of NCLT, empowering it toexamine the basis of such referenceeven before analyzing the viability ofthe revival scheme. Reference may berejected at this stage itself.

Note 1: As regards making of reference to Board, an industrial company can now make reference to NCLT u\s 424A.But now Government companies have been excluded from the provision of Chapter VI A of the Companies Act.U\s 424A(1), a government company can make a reference under the Act to NCLT only with prior approval ofCentral or State government.

“Deemed government company” u\s 619B of the Companies Act, can not be regarded as a government company,hence can make a reference without the prior consent of the Central or State government.

Note 2: All healthy companies are now required to pay a cess towards the “Rehabilitation & Revival Fund” for sickindustrial companies that will be at the disposal of NCLT.

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17 Powers of Board tomake suitableorders on the com-pletion of inquiry.

u\s 424C NCLT has to consider anddecide whether it is practicable forthe company to revive on its ownwithin a reasonable time.Alternatively, it may direct any oper-ating agency to prepare such schemein accordance with the guidelinesprescribed by it in this behalf.

No change, except that the words “makerepayment of loan” have been insertedcorresponding to the change made in thedefinition of “sick industrial company”.Under SICA, 7-10 years was consideredto be a reasonable time for the companyto make its net worth exceed the accu-mulated losses. NCLT has, till now, notdecided what should be the range ofreasonable time, but definitely in thepresent standards 7-10 years is too longto be considered reasonable.

18 Preparation andsanction of schemefor revival & reha-bilitation.

u\s 424D Operating agency to pre-pare the scheme for revival & reha-bilitation with specific regards tothe guidelines of RBI.

NCLT may review and modify thescheme, if necessary -424D(5)

The draft scheme as vetted byTribunal to be circulated- 424D(3)

Draft scheme may be sanctionedwithin 60 days from the date ofadvertisement\ circulation, extend-able upto 90 days- 424D(4)

Copy of the sanctioned scheme tobe filed with the Registrar-424D(9)

Scheme may also be prepared bythe creditors of the sick company,if agreed to by 75 % of creditors -424D(11)

Scheme shall be binding on creditorsand all concerned -424D(13)

Scheme to be prepared within 60 days(extendable upto 90 days) as againstearlier provision of 90 days.

No change in what the revival schemeshould provide for, except that now itmay provide for measures for repaymentof debts. (consequential to the change indefinition of sick industrial company)

Brief particulars of draft scheme may bepublished. Earlier “shall” was used, makingpublication of advertisement compulsory.

Earlier, there was no time limit.Further, “shall” was used making itcompulsory for BIFR to sanction thescheme.

New Provision

New Provision. Provisions i.r.o. prepa-ration and sanction of scheme will alsoapply to the scheme prepared by thecreditors-424D(12)

New Provision. But seems to be aduplication of Section 424D(10), whichprovides that the scheme shall be bind-ing on the company and others.

19 Rehabilitation by giv-ing financial assistance.

Similar provisions incorporated inSection 424E

No change

19A Sick Industrial com-pany\bank\FI\Government can applyto Board to con-tinue the operationsof the said company

Similar provisions incorporated inSection 424F

No change

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20 Board was requiredto record and for-ward its opinion forwinding up of thesick industrial com-pany to the HighCourt.

Tribunal can itself order thewinding up of the company, if it isof the opinion that the sick companyis not likely to revive.

Tribunal can appoint any officer of theoperating agency to act as the liquidator.

Further, Tribunal can also sell offassets of the sick company and dis-tribute the proceeds in accordancewith section 529A.

Section 20(2) of SICA becomes redun-dant as Tribunal can itself order wind-ing up instead of merely forwarding itsopinion to the High Court.This power was earlier vested with theHigh Court.

This power was with BIFR underSICA.

Note: Significant provision incorporated u\s 424G(4), directing that the winding up should be completedwithin one year from the order of winding up.

21 Operating agencyto prepare inven-tory, list of credi-tors, valuation etc.

Similar provisions incorporated u\s424H

No change

22 Suspensions of legalproceedings, con-tracts etc., thus pro-viding completeimmunity fromlegal suits, recoveryproceedings andwinding up peti-tions made duringthe inquiry andimplementation ofthe scheme.

No parallel provision in the new law.Recovery proceedings and suitsagainst the sick industrial companycan continue even if enquiry is pend-ing with NCLT or revival & rehabili-tation scheme is pending for prepa-ration or implementation.

No protection to sick industrial com-pany against suits or legal proceedingsfor recovery of money or executionagainst property.However, winding up proceedings maybe kept as these are with the sameTribunal.

23 and 23A Proceedings in caseof potentially sickindustrial compa-nies.

No parallel provisions in the Act.

25 Appeal to AAIFRagainst the order ofBIFR

Now appeal against the order ofNCLT has to be made to NCLAT.

28 BIFR required tofurnish informationand return toCentral\ State Govt.and to collect fromand furnish certaininformation to vari-ous authorities.

No corresponding provision.

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CCOONNCCLLUUSSIIOONNThe above analysis indicates that the new Act has

made an attempt to remove the bottlenecks and curb thepractice of turning an operationally fit company into asick unit. The Government deserves a pat for creating aneffective legal framework, wherein, the banks\ financialinstitutions will now not hesitate to provide capital assis-tance to industrial undertakings.

However, the absence of well-developed secondarymarkets in India raises considerable doubt regarding theeffective enforcement of recovery proceedings. The lackof institutional framework for sale of assets of the sickunit delays the process, thereby diminishing the realiza-tion value of the asset. Moreover, no thought seems tohave been given to curb the past practice of the sick unitsgetting their assets bought back by kith and kin violatingarms-length transaction.

The need of the time is “turn arounders”, specialisedfirms that exclusively work for the revival & rehabilitationof sick\ potentially sick units. This does not, however,undermine Government’s responsibility to instituteproper administrative measures to dissuade deliberateefforts from delaying the regulatory mechanism. ■


32(1) Overriding impactover all other lawsexcept, FEMA andUrban Land(Ceiling &Regulation) Act andalso the Memo-randum and articlesof association of thecompany.

No parallel provision. Overridingimpact done away with.

Various legal provisions under differ-ent enactments have to be compliedwith to make the sanctioned schemeeffective.

33 Penalty for certainoffences

Penalty of imprisonment upto 3years and fine upto Rs.10 lacs for vio-lation of orders of Tribunal, makingfalse statements or giving false evi-dence or attempt to tamper recordsof reference or appeal.

Following changes incorporated:● Limit of fine fixed upto Rs.10 lacs.

● “tamper records of reference orappeal”- recognised as a punish-able offence.

34 Offences by com-panies

No parallel provision under the Act

35 Central Govt.empowered toremove difficultiesfor the first 3 years.

No parallel provision under the Act

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The book review on 'Managerial Accounting forHospitals' authored by Shri G P Kulkarni - thatwas published at page no. 820 of the February2004 issue of the Chartered Accountant Journal -was done by Shri S K Ganguly, FCA, a New Delhibased practicing member of the Institute.Omission of his name, by inadvertence, is deeplyregretted.

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