LEGAL ASPECTS OF BUSINESS

DANIEL ALBUQUERQUE

CHAPTER 13
T H E S I C K I N D U S T R I A L C O M PA N I E S R E P E A L AC T ,
2 0 0 3 , A N D G U I D E L I N E S O N I N S O LV E N C Y

CHAPTER OUTLINE
Introduction and Interpretation
The Sick Industrial Companies Act, 1985
and 2003 within the Context of The
Companies Act, 1956
Agencies to Deal with Sick Companies and
Dispute Resolution
Guidelines on Insolvency

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INTRODUCTION AND INTERPRETATION

A committee of experts was formed in 1981 under
the chairmanship of Shri T. Tiwari to make
recommendations to the government regarding the
alarming growth rate of sick industrial units in both
the government and private sectors.
Based on the recommendations, a law was enacted
titled Sick Industrial Companies (Special Provisions)
Act, 1985. known by its acronym SICA.
In 1987, the Board of Industrial and Financial
Reconstruction (BIFR) and the Appellate Authority for
Industrial and Financial Reconstruction (AAIFR) were
established.
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INTRODUCTION AND INTERPRETATION

Furthermore, in 1991 and 1993 more amendments
were introduced to determine the industrial problems
or sickness. The SICA seemed to have problems as
increasingly companies took this route to exit.
This Act not only saved them from difficult legal
procedures but also allowed them to obtain financial
relief which, in turn, burdened the banks. Another
factor that forced reform was the piling up of the
non-performing assets (NPAs).
Hence, in 2003, the Sick Industrial Companies
(Special Provisions) Repeal Act was enacted.
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Contd

INTRODUCTION AND INTERPRETATION

This replaced the institutions created by the SICA,
and the National Company Law Tribunal (NCLT) was
responsible for their revival and rehabilitation.
Furthermore, any appeal against the order of this
agency would be expedited by the National Company
Law Appellate Tribunal (NCLAT).

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INTRODUCTION AND INTERPRETATION

Objectives of SICA
1.To evaluate the economic viability of sick industrial
companies with a view either to rehabilitate them, if
the public interest so demanded and if their
rehabilitation was possible, or to close them down, if
continuing them would be impossible
2.To stop the continued drain of public and private
resources for the overall economy of the country
3.To protect employment as far as possible

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INTRODUCTION AND INTERPRETATION

Industrial Sickness
Sec. 23 of SICA clarifies the meaning of industrial
sickness. It is the accumulated losses of an industrial
company that, at the end of any financial year, have
resulted in a depletion of 50 per cent or more of peak
net worth of the immediately preceding four financial
years. A company in such a financial position is
considered to be a potentially sick industrial company.

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INTRODUCTION AND INTERPRETATION

Internal and external
causes of industrial
sickness

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THE SICK INDUSTRIAL COMPANIES

ACT AND THE REPEAL ACT

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AGENCIES TO DEAL WITH SICK COMPANIES

AND DISPUTE RESOLUTION

Company Law Board

Board for Industrial and Financial Reconstruction
(BIFR)
The AAIRFR
NCLT and NCLAT

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GUIDELINES ON INSOLVENCY
a) Insolvency refers to a person who is unable to pay
his debts when called upon to do so.
b) Bankruptcy is the legal process that an insolvent has
to undergo.
c) Liquidation refers to the situation when after the
payment of its debts and liabilities, a companys net
assets are divided among its shareholders.
d) Dissolution is the reverse of formation of a company,
and this legal process is known as winding-up.

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GUIDELINES ON INSOLVENCY
Corporate insolvency is governed under the
following:
(a) Secs 391394, 433483; 528545 of the Companies
Act
1956 Dispute redressal under CLB, NCLT, and
NCLAT.
(b) Sick Industrial Companies (Special Provisions) Act,
1985
Dispute redressal under BIFR.
(c) Asset Reconstruction under Securitization and
Reconstruction of Financial Assets and
Enforcement
Security
Interest
Act, 2002
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GUIDELINES ON INSOLVENCY
(d) Sick Industrial Companies (Special Provisions)
Repeal Act, 2003
Dispute redressal under tribunal.
(e) Recovery of debts due to Banks and Financial
Institutions Act, 1993
Dispute redressal under tribunal.

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GUIDELINES ON INSOLVENCY
Jurisdiction
The Presidency Insolvency Act, 1920, is applicable to
Calcutta, Bombay, and Madras, and the Provisional
Towns Insolvency Act, 1908, is applicable to the rest
of the country.

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GUIDELINES ON INSOLVENCY
Objectives of Insolvency Legislation
1. To restore the debtor company to profitable trading
where this is practicable; to maximize the return to
creditors as a whole.
2. To bring to book those guilty of mismanagement,
and where appropriate, deprive them of the right to be
involved in the management of other companies.
3. To provide a battery of legal and administrative
instruments and institutional structures:
(a) Rehabilitative
(b) Distributive
(c) Penal
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GUIDELINES ON INSOLVENCY
Procedures
1. File petition under the given or chosen Act.
2. All the company documents and audits are attached
to the petition.
3. The dispute redressal agency, such as a board or
tribunal, will examine debts for which it will appoint a
receiver.
4. The board or tribunal will hear all the concerned,
particularly the creditors.
5. Upon adjudication of all facts and examination of
evidence, the board or tribunal may pass the order of
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GUIDELINES ON INSOLVENCY
Effects
1. Insolvency of a company suspends the rights of
the directors or the company in dealing with its
assets other than with the regulation of the court.
Fraudulent preferences
or transfers made during the insolvency or transfer
of shares are avoided.
2. Only the official liquidator can enter into fresh
legal contracts on behalf of the company who
records each legal proceeding pending with leave of
the court.
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GUIDELINES ON INSOLVENCY
3. The decree will have to be passed
against the official liquidator and, in the event of an
unsecured claim, only proofs in insolvency are the
appropriate remedy as unsecured creditors shall
have to participate in insolvency.
4. Only secured creditors can prove against the
official liquidator outside of the procedure of the
insolvency law in normal civil proceedings.

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GUIDELINES ON INSOLVENCY
6. When more than one insolvency actions are
initiated, all liquidation matters are determined
by proofs of insolvency before the official
liquidator regulated by the company court.
Multiple insolvency matters are effectively
consolidated in a single winding-up action or
procedure.

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