From SICA to IBC

Key Takeaways

• Government introduced the SICA legislation to tackle the revival and rehabilitation of sick industrial units in 1985 but it was repealed in 2016 completely.

• The Insolvency and Bankruptcy Code,2016 is a very exhaustive code and provides for a Corporate Insolvency Resolution Process for revival and rehabilitation of sick companies and covers insolvency, liquidation, voluntary liquidation and bankruptcy laws in India.

1. INTRODUCTION

A lot of companies and industries are being formed in today’s dynamic world to meet different needs and expectations of the society. It is not necessary that every industry succeeds in its operations and it may fail due to a wide variety of reasons. As per a recent study conducted by Bureau of Labor Statistics (BLS) around 20% of businesses fail during the first two years of opening itself and as an obvious consequence not only a lot people lose their jobs but it also leads to wastage of national resources. A developing nation like India witnessed industrial sickness in industries such as cotton, jute, sugar, textile and small steel giving a major blow to the economy in the 1980s.To take on over the problem of industrial sickness, government of India on the recommendations of the Tiwari committee enacted and adopted the Sick Industrial Companies Act,1985. Various reforms have since then taken place to deal with industrial sickness time and again.

2. MEANING OF SICK UNITS

Sick units or industrial sickness in a general sense can be understood as a unit or industry which has been incurring losses on a continuous basis or is defaulting often in its debt repayment obligation or is largely dependent on infusion of external funds for its survival. The reasons for industrial sickness ranges from internal factors such as faulty management policies, unsound financial planning, poor labour relations etc. to external factors such as abrupt changes in government policies, shortage in supply of basic inputs like power and water etc. As per SICA legislation of 1985 a sick unit is one which has been in existence for at least 5 years and with that it has accumulated losses more than or equal to its net worth in any financial year.

3. TRANSITION FROM SICA,1985 TO IBC, 2016

• To detect sick and potentially sick industrial units and to revive them if possible, the government of India enacted the Sick Industrial Companies Act, 1985 popularly known as SICA legislation. The act provided for establishment of BIFR (Board for Industrial and Financial Reconstruction) to determine sick industries and assist in reviving and rehabilitating them. AAIFR (Appellate Authority for Industrial and Financial Reconstruction) was also established as an appellate body to hear appeals against the orders of the BIFR.

• The act of 1985 however, was repealed by Sick Industrial Companies (Special Provisions) Repeal Act of 2003, to overcome the loopholes of the earlier act.

• Since, the revival of sick industries under BIFR and AAIFR was irksome, NCLT (National Company Law Tribunal) and NCLAT (National Company Law Appellate Tribunal) replaced them with the Companies Act of 2013. NCLT which is a quasi-judicial body has the authority to adjudicate insolvency resolution cases and if the parties involved are not satisfied with the decision, they can lodge an appeal in NCLAT.

• However, the provisions of Chapter 9 of Companies Act,2013 for revival and rehabilitation of sick companies were omitted and replaced by the Insolvency and Bankruptcy Code, 2016 from 15th December, 2016.

• The Sick Industrial Companies (Special Provisions) Repeal Act of 2003 came into effect fully from 1st December,2016.

• By a notification in 2016, proceedings under SICA stood abated and now all the pending matters of Sick Companies shall be adjudicated by the National Company Law Tribunal by filing fresh application within 180 days from the commencement of IBC 2016.

4. PROCEDURE FOR REVIVAL UNDER IBC,2016 IN BRIEF

• The IBC shifted to the ‘cash flow’ test from the ‘sickness’ test provided under SICA and Companies Act and provided for a comprehensive “corporate insolvency resolution process” (CIRP) applying to insolvency, liquidation, voluntary liquidation or bankruptcy.

• As per the new Code corporate insolvency proceeds when the amount of default is either Rs.1lakh or more (amount has been increased to Rs.1Crore as relief measure during the pandemic.)

• The resolution process is initiated when an application for the same is filed by an Insolvency Applicant who may either be a financial creditor, an operational creditor or the company itself before the NCLT.

• The NCLT may either accept or reject the application within 14 days of receiving it and if accepted the resolution process commences which is to be completed within a period of 180 days from the date of accepting the same and can be extended by NCLT to 90 days (one time only).

• The NCLT then declares a moratorium period wherein no legal proceedings may be instituted or continued against the corporate debtor and appoints an ‘Interim Resolution Professional’ (IRP) who takes over the management of the affairs of the corporate debtor from the Board of Directors.

• A public announcement regarding the initiation of insolvency process is made with information of the corporate debtor, last date for submission of claims etc.

• A Committee of Creditors comprising of all the financial creditors of the corporate debtor is constituted by the IRP and the committee within 7 days of its incorporation has to appoint IRP as Resolution Professional (RP) or replace the IRP with another RP. This decision along with any other decision of the committee is to supported by at least 75% of voting share of financial creditor.

• A resolution plan is executed which is examined by the RP and is to be approved by 75% of voting share of financial creditor. The plan if approved is then further sent to the NCLT which may either accept or reject the same.

• If the plan is accepted then the moratorium ends on the date of such acceptance and if rejected the corporate debtor has the option to make an appeal with NCLAT or it may be wound up as per the provisions of the code.

5. CONCLUSION

Industrial sickness affects not just the stakeholders of the said industry but impacts the whole economy in some way or the other. SICA was the first act that came into existence to deal with industrial sickness in India in 1985 but it was partly repealed and replaced in 2003 with the SICA (Repeal) act and thereafter fully repealed in 2016 with the Insolvency and Bankruptcy Code coming into force.