Revival and Rehabilitation of Sick Companies By CS Tripti Chugh


INTRODUCTION:

Sick Company revival & rehabilitation related legal provisions in India have been made at par with developed countries under chapter XIX of The Companies Act 2013 read with Section 253 to 269 (which are yet to be enforced). Earlier Sick Companies (Special Provisions) Act 1985 was pro Promoters / Directors of the company but now it is Pro Creditors and much painful to revive the company. The chapter describes the circumstances which determine the declaration of a company as a sick company, and also includes the rehabilitation process of the same. The coverage of Sick Industrial Companies Act, 1985 (SICA) is limited to only industrial companies, while the 2013 Act covers the revival and rehabilitation of all companies.

SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT, 1985 (SICA)

It is a special law relating to revival of sick companies. There were some loopholes in SICA like non-applicability of SICA to non-industrial companies and small companies, misuse of immunity provided under section 22 of SICA etc. that’s why parliament has passed Companies (second Amendment) Act 2002 which has inserted PART VI A, consisting relating to revival of sick companies.

The effect of the Amendment act is that the SICA shall be repealed and PART VI A of the companies Act shall take its place.

PURPOSE BEHIND (SICA) SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT, 1985

The basic rationale (grounds) of enacting SICA was to determine sickness in the industrial units. It also aimed at expediting (facilitate) the revival of potentially viable units so as to make the investments in such units profitable. It also close unusable units to release investment which is locked up for productive use somewhere.

SOME FEATURES OF SICA, 1985

  • Sick industrial Companies (Special provisions) Act, 1985 (SICA) is a special law relating to revival of sick companies.
  • SICA intends to timely detect the sickness and take the appropriate corrective measures for revival of sick companies.
  • SICA has the overriding effect overall the existing laws. So whenever an industrial company becomes a sick industrial company, it need not comply with number of laws.
  • The sick industrial company can ignore the provisions of other laws and comply with the provisions of SICA only.

OBJECTS OF THE ACT

  • To evaluate the economic viability of the sick companies and either rehabilitate them if possible, or close them, if not possible
  • To stop continued drain of public and private resources in the interest of the economics of our country
  • To protect employment.

FOLLOWING ARE NUMBER OF REASONS FOR THE REPEALMENT (CANCELLATION) OF SICA

  • The authorities i.e. BIFR (Board for Industrial and Financial Reconstruction) and AAIFR (Appellate Authority for Industrial and Financial Reconstruction) have not been very effective in pursuing the objectives of SICA,
  • The approach of industrialists I respect of sick companies is not very constructive
  • Section 22 of SICA gives the overriding effect to BIFR over other authorities. This section has been misused to a large extent.

AUTHORITIES UNDER SICA

AUTHORITIES UNDER CA,2013

             BIFR

                         NCLT

            AAIFR

                        NCLAT                                       


UNDER COMPANIES ACT 2013

Sections 253 to 269 deals with revival of sick companies which are yet to be enforced. Until these sections are enforced sick industrial companies special provisions Act 1985 (SICA) continue to be in force.

NOTE: Companies Act 2013 has replaced the companies Act 1956 but sections 253 to 269 under new Act has not enforced till yet by MCA so sick companies are still regulated by SICA 1985.

UNDER COMPANIES ACT 2013

Revival and rehabilitation of Sick Companies under the Companies Act 2013

The concept of Industrial company/undertaking and criterion of net worth has been dropped under this Company’s act 2013. Sickness has been linked with cash flows and the rights of majority Secured creditors are being protect under these provisions. If any company has failed to pay their debt within 30 days of notice to company, they may file an application to Tribunal for determination of company as sick company. Where the tribunal is satisfied that a company has become sick company, it shall after considering all the relevant facts and circumstances of the case, which decide, as soon as may be, by order in writing, whether it is practicable for the company to make the repayment of its debts within a reasonable time. On the determination of sickness by the tribunal, the applicant shall make an application within 60 days of determination, for measures to be adopted for revival and rehabilitation. Where the tribunal determines the company as sick and where the company has no draft scheme for its revival and rehabilitation, the tribunal may direct the interim administrator who shall be appointed by tribunal from a panel maintained by the central govt. When the interim administrator submits his report about the possibility of revival, then company administrator is appointed who undertakes the approval process by creditors and submits the same to the tribunal who would sanction the scheme within 60 days of approval by creditors.

THE TWO BASIC FACTORS WHICH MAY RESULT IN SICKNESS OF AN INDUSTRIAL UNIT ARE:

Internal factors are those which arise within an organization. They include:
  • It refers to factor, which are related to the function of a given unit and within the control of the unit itself.
  • These factors include the following:-
  • Underestimation of the project cost
  • Delayed-implementation
  • Escalation of cost
  • Inadequate management
  • Sub-optimal plant/utilization
  • Poor quality of staff management
External factors are those which take place outside the organization. They include:-
  • It refers to those environment and structural factors which are outside the control of given industry or given unit as such.
  • Adverse government policy/price control
  • Recession/ economic conditions
  • Competition from market/ competitors
  • Shortage of inputs
  • Technological changes

“Revival/ Restoration of Struck off Companies under Section 248 of the Companies act (the Act)” under Section 252 of the Companies act, 2013 read with National Company Law Tribunals Rules, 2016 (As amended till 05-07-2017) by making an Appeal to Tribunal.

In brief, some light is thrown on Section 248 of the Act read with the Companies (Removal of names of the Companies from the Registrar of Companies) Rules, 2016

SECTION 248: In case the Registrar of the Companies (ROC) has reasonable cause to believe that:

(1) A company failed to start the business within one year of its incorporation OR

(2) A company is not carrying on any business or operation  for a period of two immediately preceding financial years and has not made any application within such period for obtaining the status of a dormant company under section 455;

ACTIONS:

The ROC must, specifying the intention to remove the name of the company from the register of companies:

  • Publish in form STK-5 in the website of MCA
  • Intimate simultaneously concern regulatory authorities like income-tax authorities, central excise authorities, service tax authorities seeking objections if any, within 30 days of receipt
  • Send a notice in form STK-2 requiring the directors and companies to make representation with supporting documents against the proposal of ROC in form STK-3 and form STK- 4. Such representation with supporting documents, if any, is required to be submitted within period of 30 days from the date of from STK-2;
  • Publish in the Official Gazette and
  • Publish in form STK-5A in leading English news in the English language and newspapers of vernacular language
  • In case, no representation or no objections from any quarter is received within 30 days from the day of such notices, ROC can strike off the names of the company from the register of companies. After struck off, ROC is required to publish as a notice inform STK-7 about thedissolution in the Official Gazette and at the website of the MCA.

Through Notification issued on 05th July 2017, the central government hereby amends by inserting Rule 87A in National Company Law Tribunals Rules, 2016 called "National Company law Tribunal (Amendment ) Rules, 2017".

Rule 87A inserted after Rule 87- "Appeal or Application under Section 252(1) and 252(3), of the Act"

Where Section 252 of Companies act, 2013: Appeal to Tribunal by any person aggrieved by the order of Registrar under Section 248 (Power of Registrar to remove the name of the company from Registrar of Companies).

FILING OF APPLICATION FOR RESTORATION OF NAMES:

As Per the Provisions of Section 252 of Companies Act 2013 And NCLT Amended Rules, 2017 following are the persons who can file an application :

  • Any person aggrieved by order under section 248
  • Registrar of Company himself
  • by Company
  • by member
  • by creditor
  • by workmen

APPEAL (Section (1) read with Rule 87A)

(i) ANY PERSON aggrieved by the order of the Registrar under section 248 (Name of company struck off)

May within 3 years from the date of order file an appeal to National Company Law Tribunal in (Form NCLT-9) for the restoration of Name of Company in the Register of Companies?

A copy of the appeal with supporting documents is to be served to Registrar and any other person as per the direction of Tribunal at least 14 days before the date of hearing is fixed for appeal.

(ii) If registrar believes that name of the company is struck off:

  • Inadvertently; or
  • on the basis of incorrect information furnished by the company or its directors;

THE REGISTRAR can also file an application within 3 years from the date of the order of dissolving Company to Tribunal for the restoration of the name of the Company. (In Form NCLT-9).

If satisfied, the Tribunal may pass the order for restoration of the name of the Company.

APPLICATION (Section 252(3) read with Rule 87A)

A COMPANY/MEMBER/CREDITOR/WORKMEN can also file application

Feels aggrieved by Company to tribunal for restoration of name of the company (In form NCLT-9) within 20 years from the publication of the order in the official Gazette.

Grounds on which application can be filed under Section 252(3)

An application so made will be accepted, if the Tribunal is satisfied that the company was, at the time of its name being struck off, carrying on business or in otherwise it is just that the name of the company is registered to the register of companies.

If satisfied, the Tribunal may pass the order for restoration of the name of the company.

PROCEDURE TO FILE AN APPEAL

The general headings in all proceedings before the tribunal, in all advertisements and notices, shall be in Form No. NCLT-4

  • Filing of appeal or application in Form NCLT-9
  • Appeal or application shall be verified by an affidavit in Form NCLT-6
  • Every Party may appear before tribunal in person or through authorized representative, appearance through Memorandum of Appearance in Form NCLT-12
  • Serving of appeal or application to Registrar or other Regulatory authorities as per direction of ROC 14 days before date of hearing
  • Notice to be issued to the tribunal to the opposite party shall be in Form NCLT-5
  • Hearing by Tribunal of Both parties
  • Issue of Directors by Tribunal to parties
  • Filling order with ROC within prescribed time frame
  • Publication in Official Gazette.

RESTORATION

  • Order so passed by the Tribunal must be filed in form INC-28 with the Registrar within 30 days from the date of the order and on receipt of the order; and
  • The Registrar is required to cause the name of the company to be restored to the register of companies and issue a fresh certificate of incorporation.

COMPLIANCE’S TO BE DONE AFTER THE ORDER FOR RESTORATION

Following are the compliances to be done:

  • Certified copy of order to be filled with Registrar, within 30 days of the date of the order.
  • Shall be filled by the company in form INC-28 along with fee
  • Registrar shall do, in his official name and seal, publish the order in the Official Gazette; from notice of such delivery,
  • The company to comply with pending filing of financial statements and annual returns with Registrar complying with Companies Act, 2013

Section 253-DETERMINATION OF SICKNESS

Section 253 of the Companies Act, 2013 talks about the determination of the sickness of a company. According to it any secured creditor of a company representing 50 % or more of outstanding amount of debt, the company has failed to pay the debt within a period of thirty days of the service of the notice of demand or to secure or compound it to the reasonable satisfaction of the creditors, then any secured creditor shall file an application to the tribunal in a prescribed manner along with references of all such evidence for such default, non-payment, etc.

On the receipt of the application from the secured creditor, then the tribunal shall decide within sixty days on to the merit of the application that whether a company has become sick or not.

Once the tribunal is satisfied that a company has become a sick company, and it is in a position to repay its debts, within a reasonable time, it shall order the company to repay its debts.

On satisfaction, the tribunal shall give a reasonable time to the company to make payment of its debts.

Section 254-APPLICATION FOR REVIVAL AND REHABILITATION

Section 254 of the Companies Act, 2013 talks about the application for revival and rehabilitation and according to which any company that has been determined as sick company under section 253 of the Act can make an application to the tribunal to order for necessary steps to be taken for its revival and rehabilitation and the application shall be accompanied by-

  • Audited financial statements of the company relating to the immediately preceding financial year;
  • Such particulars and documents, duly authenticated in such manner, along with such fees as may be prescribed.
  • A draft scheme for revival and rehabilitation of the company in such manner as may be prescribed.

The application shall be made to the tribunal within sixty days from the date of determination of the company as a sick company by the tribunal under section 253 of the Companies Act, 2013.

Section-256 APPOINTMENT OF INTERIM ADMINISTRATOR

As per section-256, on the receipt of an application under section 254, the Tribunal shall, notlater than 7 days from such receipt:

  • fixes a date for hearing not later than 90 days from date of its receipt
  • appoint an interim administrator (PCS can be appointed) to convene a meeting of creditors to be held not later than 45 days from receipt of the order of the Tribunal
  • issue such other directions to the interim administrator as the Tribunal may consider necessary to protect and preserve the assets of the sick company. Interim administrator has to consider whether on the basis of the documents furnished and draft scheme filed, it is possible to revive and rehabilitate the sick company.

Interim administrator is to ascertain and submit a report to Tribunal, within 60 days from date of the order whether it is possible to adopt measures for the revival and rehabilitation of the sick company.

Where no draft scheme is filed by the company and a declaration has been made to that effect by the Board of Directors, the Tribunal may direct the interim administrator to take over the management of the company.

Section 257 - COMMITTEE OF CREDITORS

According to section 257, an interim administrator shall appoint a committee of creditors such number of creditors as he may determine but shall not exceed seven and these members shall meet in all the meetings and the interim administrator may direct all the promoters, directors, key managerial personnel of the company to come in any meeting and furnish such information as is required and necessary. 

Section 258- ORDER OF TRIBUNAL

As per Section 258, on the date of hearing fixed by the Tribunal and on consideration of the report of the interim administrator filed under sub-section (1) of section 256, if the tribunal is satisfied that the secured creditor’s representing 3/4th in value of the amount outstanding against the sick company present and voting have resolved that:

  • “It is not possible to revive and rehabilitate such company"- Tribunal shall record such opinion and order that the proceedings for the winding up of the company be initiated.
  • “It is possible to revive and rehabilitate such company by adopting certain measures"- Tribunal shall appoint a company administrator for the company & cause such administrator to prepare a scheme of revival and rehabilitation.

Section 261-SCHEME OF REVIVAL AND REHABILITATION

A scheme for revival and rehabilitation shall be prepared by the company administrator as per the provision of section 261 and it shall include measures like

  • financial reconstruction of the sick company
  • proper management of the sick company
  • amalgamation of the sick company with other company or other company with the sick company
  • takeover of the sick company by solvent company
  • sale or lease of a part of any assets
  • rationalization of managerial personnel
  • Such other preventive measure as may be necessary.

The scheme shall be sanctioned as per section 262 of the Act and shall be binding on the party and shall be implemented by the tribunal by taking all necessary steps.

Section 263-Winding up of Company on the report of company administrator

As per the provisions of the section 263 of the Act, the company shall be wound up if the scheme is not approved by the creditors and the administrator shall submit the report within fifteen days and the tribunal shall order for the winding up of the company.

OTHER LAWS WHICH ARE AS FOLLOWS:

SECTIONS

PROVISIONS

Section-259

Appointment of Administrator

Section-260

Duties of Company Administrator

Section-262

Sanction of the Scheme

Section-263

Binding of the Scheme

Section-264

Implementation of the Scheme

Section-265

Winding up of the Company

Section-266

Power of Tribunal to assess damages against delinquent (law-breaking) directors

Section-267

Punishment for certain offences

Section-268

Bar of Jurisdiction

Section-269

Rehabilitation and insolvency fund


THE ABOVE USED SCHEME REFERS TO REVIVAL AND REHABILITATION

CONCLUSION

Thus, the Companies Act provides exhaustive measures for the revival and rehabilitation of the sick companies and the tribunal is vested with powers to take all necessary measures for the revival and rehabilitation of the sick companies. One has to see the grounds, facts and to collect certain documents before filing any such application or appeal for revival of Company. The time limit prescribed under the provisions for making an application is 20 years, applicant can choose to file the said application after arranging all such documents.

Author
CS Tripti Chugh

An associate member of ICSI having good drafting skills and knowledge of Companies Act 2013. She is also holding Master degree in finance. She has written various articles on companies act 2013 including all the amendments made in the Act. To Know more about the author contact at cstriptichugh90@gmail.com

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