Revival of Sick Companies and Corporate Resolution Insolvency Process

Ashish M. Shaji

13 Sep, 2022

Industrial sickness can cause a terrible impact on Indian economy. Therefore it’s important to revive sick industrial units. In this article we shall discuss the revival process of such companies.

What is Sick Industrial Company?

According to the Sick Industrial Companies Act, 1985^[1] Sick Industrial Company:

• Is an industrial company and should have been registered for not less than 5 years.
• Which at the end of its any financial year has accumulated losses equal or more than its entire net worth.

As per the Companies Act 2013 Sick Industrial Companies Means:

Industrial Companies which has Accumulated losses in any financial year equal or more than 50% of its average net worth during four years immediately preceding the current financial year.

The growth of any country is dependent on how the industries are growing and generating revenue for the economy. With the growth of the industries, the economy will also grow so it is necessary to keep an eye on the growth of industries. As to regulate the Sick Companies, Government of India enacted a special legislation named as Sick Industrial Companies Act 1985. The main aim of the act is to determine the sickness of industrial units and initiate the revival procedure.

It is expected that after initiating the revival procedure the idle investments made in sick units will become productive and by closing such industries the locked up investment will become productive. Earlier SICA was applicable only to industrial companies and not on trading and service companies. Later on the act was modified to include the Government companies.

Earlier all the proceedings related to revival of sick companies were adjudicated by the Bureau for Industrial and Financial Reconstruction (BIFR)after the changes made in the notification of Government of India on May 28^th,  2016. Now the National Company Law Tribunal shall adjudicate all the matters of Sick Companies and the earlier cases which are pending with Bureau for Industrial & Financial Reconstruction or Appellate Authority for Industrial & Financial Reconstruction and High Court will be transferred to the National Company Law Tribunal.

An insolvency resolution process can be initiated by either a creditor, or by the debtor, upon an event of default. At present the SICA Act, 1985 is repealed and the company in respect of which such appeal or reference or inquiry stands abated in BIFR and AAIFR may make reference to NCLT under the Insolvency and Bankruptcy Code 2016 by filing fresh application for Corporate Insolvency Resolution Process (CIRP) within 180 days from the commencement of IBC 2016.

Earlier laws pertaining to DRT and SARFAESI were the exclusive forums for banks/financial institutions while BIFR and Companies Act had limited application for sick companies, their revival and/or liquidation. The Insolvency and Bankruptcy Code, 2016 will overcome these kinds of problems.

Persons who are not entitled to initiate Corporate Insolvency Resolution

• A corporate debtor who is undergoing a corporate insolvency resolution process; or
• A corporate debtor having completed corporate insolvency resolution process twelve months preceding the date of making of the application; or
• A corporate Debtor or a Financial Creditor who has violated any of the terms of the resolution plan which has been approved 12 months preceding the date of making application;
• A corporate debtor in respect of whom a liquidation order has been passed so that finality of the liquidation order is ensured.

Corporate Resolution Insolvency Process

• The Financial Creditor/Operational Creditor or Corporate Debtor as the case may be, initiates the CIRP by applying to NCLT under section 7, 8 and 10 respectively.
• Financial Creditor on Default and operational Creditor after ten days from the date of delivery of demand notice can initiate CIRP.
• A Financial Creditor, Corporate Debtor and Operational Creditor will propose the name of the IRP.
• NCLT within 14 days of receipt of application by order admit or reject application (before rejecting give notice to rectify the defect within 7 days of receipt of notice).
• Intimation of admission or rejection to be given by NCLT within seven days of admission or rejection.
• NCLT to declare Moratorium, appoint Interim Resolution Professional (IRP) for a term not exceeding thirty days from the date of appointment and cause public announcement.
• Details such as name and address of the corporate debtor under the CIRP, name of the authority with which corporate debtor is registered, the last date for submission of claims and date on which CIRP will be closed etc will be included in public announcement
• Insolvency Commencement date starts from the date of admission of application and is to be completed within 180 days of commencement which can be extended to ninety days (one time) by NCLT.
• Interim Resolution Professional to constitute Committee of Creditors comprising all financial creditors.
• Management of affairs of corporate debtor as a going concern, powers of Board of Directors or the partners of debtor shall stand suspended and exercised by the Interim Resolution Professional (IRP).
• Committee of Creditors within 7 days of its constitution either to resolve to appoint IRP as Resolution Professional (RP) or replace IRP with another RP.
• All decisions of committee of creditors shall be taken by vote of not less than 75% of voting share of financial creditor.
• Preparation of information memorandum by RP for formulation of Resolution Plan by Resolution Applicant.
• Resolution Applicant prepares the Resolution plan based on information memorandum.
• Submission of Resolution Plan by Resolution Applicant to be examined by Resolution Professional and to be approved by 66% of voting share of financial creditor.
• RP to submit approved Resolution Plan to NCLT which shall approve or Reject/Order for Liquidation.
• The approved plan shall bind the corporate debtor and its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan.
• Moratorium ends on the date of approval.
• Appeal may be made to NCLAT on Rejection.

Conclusion

The revival of sick companies is crucial so as to prevent closing down of such unit which would further lead to hardships for employees. It will also cause loss of revenue to the state. In case you need any additional information, contact Enterslice.

Read our article:Voluntary Liquidation of a Company under IBC