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Legislations, The Law

Sick Industrial Companies Act (SICA), 1986: A Critical Analysis

The Sick Industrial Companies (Special Provision) Act, 1985 was enacted by the Government of India on the recommendations given by the T. Tiwari Committee Report (1981) to deal with the issue of widespread industrial sickness in India which created a methodical financial risk.

By: Anushka Tyagi, 3rd Year, National Law University, Jodhpur.

The Sick Industrial Companies (Special Provision) Act, 1985 was enacted with a view to secure timely detection of sick or potentially sick companies owning industrial undertakings, to take speedy action by Board of experts to take steps with respect to these companies and to the enforcement of the measures so determined. The act aimed to help revive these sick companies or help in their closure, if not so that the investment locked with these companies could be used somewhere productive.

Defining Industrial Sickness

The Act defined a sick industrial as one which had existed for 5 years and had incurred accumulated losses equal to or more than its entire net worth at the end of any financial year.

This sickness could be caused by various internal (mismanagement, overestimation of demand, wrong location, poor project implementation etc.) and external factors (energy crisis, raw materials shortage, infrastructure bottlenecks, inadequate credit facilities etc.)

Industrial Sickness, especially one which is widespread, impacts economy by causing the government loss of revenue, increasing non-performing assets with the financial institutions, unemployment increase, loss of production and lacking productivity among other adverse problems which are of socio-economic nature.

Important Features of the Act:

The Act established through its provisions two quasi-judicial body who were responsible for dealing with the cases brought under this Act. These two quasi-judicial bodies included — 

  1. The Board for Industrial and Financial Reconstruction (BIFR) which was equivalent to an apex boards responsible with dealing with the issue of industrial sickness. The duties of the board included reviving the potentially sick industrial units and rehabilitating them, and also, to liquidate non-viable companies.
  2. The Appellate Authority for Industrial and Financial Reconstruction (AAIFR) was set up to hear the appeals brought up against the orders of the BIFR.

Why was the Act not successful?

The functioning of the Act was not found to be satisfactory and a lot of issues were found during the period of its implementation. The definition of ‘sickness’ was termed to be deficient and restrictive under the act and belatedly it was recognised by the BIFR as well.

Nirmala Ganapathy said: “One look at the track record of BIFR, and it doesn’t take a whiz  to conclude that it is nothing but a graveyard of companies. A tiny fraction comes out healthy — only if the promoter is interested in putting it back up on its feet”

The Act fell short in a lot of aspects, Section 22 being the most problematic of them. Section 22 dealt with moratorium and granted immunity against any kind of proceedings for the recovery of dues, during the pendency of an inquiry of the preparation or operation of a scheme. The Government felt that the two quasi-judicial bodies were not able to fulfil their purpose as envisaged under the Act of providing schemes and plans which were viable for reviving sick companies in a reasonable time frame.

Apart from the above issues, it was found that the decisions of the BIFR and the AAIFR were frequently appealed to the High Court which created more issues by the disposal of the cases being delayed for a long time.

There were also procedural as well as legal defects with the BIFR. The BIFR took a substantial time in determining whether a company was ‘sick’ and then only were the revival proceedings formulated. Consideration of the same also takes substantial time since banks and  financial institutions  have  their  own  hierarchy  in  decision  making,  leading  to  avoidable  delays.  The decisions  by  the  banks  are  also  neither  transparent,  nor  subject  to  judicial  review.  By  the  time decisions  are  taken  and  communicated,  the  plan,  which  had  been  conceived,  loses  its  viability resulting in failure of revival schemes even after sanction.

Amendment and Repeal of the Act

  1. Justice V. Balakrishna Eradi Committee, 1999

The Government in 1999 constituted a Committee under Justice V. Balakrishna Eradi, to review the law regarding the Insolvency and Winding of Companies. The Committee presented a report titled, ‘Report of the High Level Committee on Law Relating to Insolvency and Winding up of Companies’. After hearing all parties and analysing statistical data presented to it, opined that the facts and figures indicated that the utility of SICA and the institutions established under it were in question.

The problem was caused mainly by the delays which were inherent in the procedures under the Act concerning revival and reconstruction. These delays were further intensified by large scale misuse of provisions contained in Section 22 which allowed suspension of legal proceedings, suits and enforcement of contracts and other remedies.

The Committee pointed out that the relative effectiveness of the ACT was compromised by the delays caused by the BIFR in disposal of cases. The success rate of the provisions enshrined in the act had hence fallen short of what it was expected to be.

The Committee concluded this report by recommending that the Act should be repealed and the provisions which were contained therein concerning the rehabilitation and revival of the company should be modified and brought under the Companies Act, 1956.

2. Advisory Group on Bankruptcy Laws, 2001

The Advisory Group was headed by N.L. Mitra who recommended that the BIFR as well as the AAIFR should be disbanded and the insolvency laws should be made into a separate and comprehensive bankruptcy code to govern insolvencies which were Corporate in nature.

The Government accepted the suggestion given by the Group regarding the Companies Act for creating a consolidated tribunal  in the form of the National Company Law Tribunal (NCLT) and the appellate authority, the National Company Law Appellate Tribunal (NCLAT)  who were to take over the functions which were earlier under the BIFR and the AAIFR and also the High Courts as concerning insolvency.

The decision was taken to incorporate the provisions relating to sick Industries in the Companies (Second Amendment) Act, 2002 by adding Part VI under the topic of ‘Revival and Rehabilitation of Sick Industrial Companies” from Section 424A to 424L and thereby it was decided that the act would be repealed by bringing the SICA (Special Provisions) Repeal Act, 2003.

However these changes did not come into effect for 2 primary reasons —

(a) the constitutionality of creating the NCLT and the NCLAT was challenged on the grounds of excessive delegation of judicial functions—a petition in the Supreme Court was not disposed until 2010 when the constitutionality was upheld but there were changes recommended with respect to specifics as to the appointment criteria to such bodies.

(b) other provisions in the Companies (Second Amendment) Act, 2002 and the SICA (Special Provisions) Repeal Act, 2003, were not notified, and therefore not brought into effect by the Government through publication in the Official Gazette.

Hence, both laws continued to prevail at that time and the BIFR and the AAIFR continued to function.

3. J Irani Committee Report, 2005

The Committee formulated to review the laws concerning liquidation and restructuring of the companies recommended several revisions to the Companies Act, more particularly for a transparent and globally acceptable insolvency and restructuring procedures, in short.

According to the report, “it is important that the basic principles guiding the operation of corporate entities from registration to winding up or liquidation should be available in a single, comprehensive, centrally administered framework”.

  • The Companies Act, 2013.

Chapter XIX (sections 253 to 269) of the Companies Act, 2013, i.e. the successor legislation of the Companies Act, 1956 deal with revival and rehabilitation of sick companies. Section 255 of the Code read with 11th schedule provides for amendments in the Companies Act, 2013.

  • Insolvency and Bankruptcy Code, 2016 

Section 252 of the Insolvency and Bankruptcy Code, 2016 provides for amendment of the SICA Repeal Act in the manner provided under read with the 8th schedule of section 252. 8th schedule provides for substitution in section 4 (b) of the SICA Repeal Act. The section provides that any reference made to BIFR, or any enquiry before BIFR or any appeal pending before the AAIFR would automatically stand abated from 01.12.2016. Furthermore the proviso of section 4(b) of the Repeal Act, 2003 provides the companies, who have made any reference made to BIFR, any inquiry pending before BIFR, any appeal preferred to AAIFR, or any proceedings pending before BIFR/AAIFR to make a reference to the NCLT under the Code within 180 days from the commencement of the provisions of the Code i.e., 01.12.2016. The enactment of the SICA Repeal Act, 2003 has allowed for cases to be dealt with in a better manner than before by consolidating sections of the SICA, 1986 in the Companies Act, 2013 and the Insolvency and Bankruptcy Code, 2016.

This would help in solving the problems caused by the sick industries to be dealt in a better manner than the one which they were facing before the BIFR and the AAIFR.

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