Revival and rehabilitation of weak industrial companies

The sick industrial companies act 1985 has been repealed. It have been brought into the companies’ act 1956. It is suitable with modifications as sections 424A to 424L and are placed under the jurisdiction of the national company law tribunal composed under section 10FB of the said act pursuant to the company’s act 2002. It is expected that the tribunal will start functioning shortly. The revival and rehabilitation specified in the sick industrial companies.

Revival and rehabilitation of weak industrial companies

 Changes of definitions From SICA, 1985

The new definition of “industrial undertaking” in the act is almost same as in the erstwhile act except an section 3 of IDRA, 1951 comes within the definition and the word “scheduled” before the word “industry” has been committed.

The term “operating agency” has been defined in such way as to show the characteristic of its members.

In the definition of a sick industrial company, the old requirement of minimum period since registration has been removed. As against the earlier definition of losses equal to or exceeding the net worth for a company to come within the definition, according to the new definition, a company will be sick one even where its losses are equal to or exceed 50% of its average net worth during the last immediately preceding four years or alternatively the new definition relates to company’s ability to pay debts. Failure to pay debts, on demand within any three consecutive quarters will make a company a sick industrial company. Erosion of not less than 50% net worth or inability to pay debt will apply separately. No minimum level of debts is given.

Suspension of legal proceedings under erstwhile act.

It is generally under the section 22 of the erstwhile SICA, 1985. The provisions now included in the companies act do not contain any such power.

Revival of a sick company

  • Reference to tribunal by the company and documents to be sent
  • Where the board of directors of an industrial company comes to know of the facts about the company that its accumulated losses are equal to or exceed 50% of its net worth, or its inability to pay debts, within 180 days from such knowledge, Along with the reference, the following will also be sent to the Tribunal:
  • A scheme developed by the company for its revival and rehabilitation.
  • An application including such particulars as may be prescribed to enable the Tribunal to determine the future steps to be adopted involving to that company.

Certificate from auditor as explained below:

Action in respect of a government company and the most important entity like private limited company registration may be preferred by their auditors.

Where a government industrial company becomes a sick company, it may inform the government concerned of the same. If the government approves, the government company may make the time specified above. Thereafter the provisions of the section 424A and other provisions of the act also apply to such a government company and accordingly the reference to the Tribunal will be accompanied by the documents referred to above.

The auditor issue Certificate will be sent with the reference

The reasons for erosion of the net worth to or below 50% or alternatively.

Power to make a reference vested also with the central or a state government or others

Any of the following namely:

  • The central government,
  • The reserve bank of India
  • A state government
  • A public financial institutuion
  • State level institution
  • Scheduled bank
  • May also make a reference to the tribunal about an industrial company.

Exceptions to sub-section (3)

A public financial institution or a state level institution or a scheduled bank can make a reference to the tribunal only where it has rendered financial assistance to the registration company concerned and has an interest in that company.

Time-limit for making reference under sub-section (3)

Any government or other institution mentioned above shall also make within 180 days from the date on which it has come to know that a company has become sick Industrial Company. The reference shall be accompanies by the documents listed above.

Making Inquiry

On receipt of the reference, the Tribunal shall make such inquiry as it deems fit to determine whether any industrial company or a sick industrial company. It may also cause an inquiry to be carried out by an operating agency for the expeditious disposal of the enquiry.

Operating agency may also be asked to make the inquiry

As mentioned above, the Tribunal may require by order any operating agency to enquire into the scheme for revival and make a report to the tribunal within 21 days from the date of the order. The tribunal may extend this period to 40 days for reasons to be recorded in writing:

Passing of final orders either on receipt of reference or upon its knowledge

The tribunal may conclude its inquiry as early as possible and pass final orders in the proceedings within 60 days from the date of receipt of reference under sub-section(1) or (3) of section 424A or upon receipt of information by it or upon its own knowledge to be reduced to writing by the tribunal. The tribunal may extend the said period to 90 days for reasons to be recorded in writing.

Appointment of special director or directors

Where the Tribunal makes an inquiry itself or causes it to be done by an operating agency, it may appoint one or more persons as Special Director or Directors on the board of the concerned company for safeguarding its financial or other interests or in public interest. But, one person company directors may not appoint more than one director. Such a person or persons shall possess knowledge, experience and expertise in management and control of the affairs of any other company.

Report by special director or directors

Within 60 days from the date of reference to the Tribunal, the special director or directors, appointed, shall submit a report to the tribunal about the state of affairs in the company. This report will be useful to the tribunal for making its final order explained above.