Revival and Rehabilitation of sick companies under new act 2013

Chapter XIX of the 2013 Act lays down the provisions for the revival and rehabilitation of sick companies.  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. Although it aims to provide comprehensive provisions for the revival and rehabilitation of sick companies, the fact that several provisions such as particulars, documents as well as content of the draft scheme in respect of application for revival and rehabilitation, etc. have been left to substantive enactment, leaves scope for interpretation.

revival of sick companies act 2013

The coverage of this chapter is no longer restricted to industrial companies, and the determination of the net worth would  not be relevant for assessing whether a company is a sick company.

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, irrespective of their sector.

The determination of whether a company is sick, would no longer be based on a situation where accumulated losses exceed the net worth. Rather it would be determined on the basis whether the company is able to pay its debts. In other words, the determining factor of a sick company has now been shifted to the secured  creditors or  banks and financial institutions with regard  to the assessment of a company as a sick company.

The 2013 Act does not recognise the role of all  stakeholders in the revival and rehabilitation of a sick company,  and provisions predominantly revolve around secured  creditors. The  fact that the 2013 Act recognises  the presence of unsecured creditors, is felt only at the time of the approval  of the scheme of revival and rehabilitation. In accordance with the requirement of section 253 of the 2013

Act, a company is assessed to be  sick on a demand by the secured  creditors of a company representing 50%  or more of its outstanding amount of debt under  the following circumstances:

•        The company has failed to pay the debt within a period of 30  days of the service of the notice of demand

•        The company has failed to secure or compound the debt to the reasonable satisfaction of the creditors

To speed up the revival and rehabilitation process, the 2013 Act provides a one year time period for the finalisation of the rehabilitation plan.

Overview of the process

•              In response  to the application made by either the secured  creditor  or by the company itself, if the Tribunal is satisfied that a company has become a sick company,  it shall give time to the company to settle its outstanding debts if Tribunal believes that it is practical  for the company to make the repayment of its debts within a reasonable period of time.

•        Once a company is assessed to be a sick company , an application could be made to the Tribunal under  section 254 of the 2013

Act for the determination of the measures that may be adopted with respect to the revival and rehabilitation of the  identified sick company either by a secured  creditor  of that company or by the company itself. The application thus made must  be accompanied by audited financial statements of the company relating to the immediately preceding financial year, a draft scheme of revival and rehabilitation of the company,  and with such other document as may be prescribed.

Subsequent to the receipt of the application, for the purpose of revival and rehabilitation, the Tribunal, not later than seven would be required to fix a date for hearing  and would be appointing an interim  administrator under  Section 256 of 2013 Act to convene

a meeting  of creditors of the company in accordance with the provisions of section 257 of the 2013 Act. In certain circumstances, the Tribunal may appoint  an interim  administrator as the company administrator to perform such functions as the Tribunal may direct.

•        The administrator thus appointed would be required to prepare a report  specifying the measures for revival and rehabilitation of the identified sick industry. The measures that have been identified under  the section 261 of the 2013 Act for the purpose of revival and rehabilitation of a sick company provides for the following options:

—   Financial reconstruction

—   Change in or takeover  of the management

—    Amalgamation of the sick company with any other company,  or another company’s amalgamation with the sick company

•        The scheme thus prepared, will  need to be approved by the secured  and unsecured creditors representing three-fourth and one-fourth of the total representation in amounts outstanding respectively, before submission to the Tribunal for sanctioning the scheme pursuant to the requirement of section 262 of the 2013 Act. The Tribunal, after examining the scheme will give

its approval  with or without any modification. The scheme, thus approved will be communicated to the sick company and the company administrator, and in the case of amalgamation, also to any other company concerned.

•              The sanction  accorded by the Tribunal  will be construed as conclusive evidence that all the requirements of the scheme relating to the reconstruction or amalgamation or any other measure specified therein have been complied with. A copy of the sanctioned scheme will be filed with the ROC by the sick company within a period of 30  days from the date of its receipt.

•        However, if the scheme is not approved by the creditors, the company administrator shall submit a report  to the Tribunal within 15  days, and the Tribunal shall order for the winding up of the sick company.  On passing of an order, the Tribunal shall conduct the proceedings for winding up of the sick company in accordance with the provisions of Chapter XX,.

Disclaimer : This PDF/PPT Research report above is an extract from the full report by prepared by the Pric Waters Cooperhouse (PwC). PwC has taken utmost care to ensure accuracy and objectivity while developing this report based on information available in public domain. However, neither the accuracy nor completeness of information contained in this report is guaranteed. PwC is not responsible for any errors or omissions in analysis / inferences / views or for results obtained from the use of information contained in this report and especially states that PwC (including all divisions) has no financial liability whatsoever to the user of this report.

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