Company Law - CHECKLIST IN PREPARATION OF SCHEME OF REHABILITATION OF SICK INDUSTRIES.

Chapter- I            THE HISTORY AND EVOLUTION OF INSOLVENCY LAWS IN INDIA

CORPORATE INSOLVENCY

The first Indian Act, regarding companies, was the Joint Stock Companies Act, 1850, based upon the English Act of 1844. This Act was replaced in 1857 which underwent a number of amendments from time to time. Presently, the said Act is in operation in the form of Companies Act, 1956. The Companies Act, 1956 deals with winding up of companies.  

However, the Companies Act, 1956 did not deal with the revival and rehabilitation of companies.  

The Reserve Bank of India set up the Tiwari Committee to look into the causes of industrial sickness, assess the depth of problem and suggest remedial measures. In 1985, based on the recommendations of the Tiwari Committee, Sick Industrial Companies (Special Provisions) Act, 1985 was enacted for expeditious determination, by a panel of experts, of the ameliorative, remedial, preventive and other necessary steps and strict enforcement and implementation thereof, to arrest sickness, as far as possible.  

In India, at present there are two enactments relating to corporate insolvency, namely, (i) Sick Industrial Companies (Special Provisions) Act, 1985; and (ii) Companies Act, 1956. While Sick Industrial Companies (Special Provisions) Act, 1985deals with the revival and rehabilitation of corporate entities, the Companies Act,1956 deals with their liquidation and winding up.[1] 

Principle laws governing insolvency in India are

1. Sick Industrial Companies (Special Provisions) Act, 1985
2. Companies Act, 1956

 They are separate. India does not have a composite law dealing with insolvency of companies. While Sick Industrial Companies (Special Provisions) Act, 1985 (hereinafter also referred to as SICA) deals with the revival and rehabilitation of corporate entities, the Companies Act, 1956 deals with their liquidation and winding up

Under the provisions of SICA, the reference made by the sick industrial company is decided by the Board for Industrial & Financial Reconstruction (BIFR). BIFR comprises of a Chairman and not less then two and not more than fourteen members and shall be persons who have been or are qualified to be High Court judges or are persons or ability and integrity and have special knowledge and professional experience of not less then fifteen years in the field of science, technology, economics, banking industry, industrial reconstruction, investment, law, labour matters, industrial finance, industrial management, accountancy, marketing, administration or any other matter. 

There is an Appellate Authority for Industrial and Financial Reconstruction (AAIFR) which comprises of a retired High Court Judge and other members. The AAIFR hears appeals from the parties aggrieved by the orders of BIFR. 

However under the provisions of the Companies Act, 1956 (1956 Act), the High Courts of India under whose jurisdiction the registered office of the Company is situated has been granted powers to deal with the winding up or liquidation of the companies incorporated under the said Act. The winding up of a company under the 1956 Act can be by an order of court or voluntary.[2]

Chapter- III        Sick Industrial Companies

A sick industrial company means an industrial company (being a company registered for not less than five years and employing fifty or above workmen), which has at the end of any financial year accumulated losses equal to or exceeding its entire net worth. Net worth has been defined as the sum total of the paid up capital and free reserves.

Sick Industrial Companies Act requires that when an industrial company has become a sick industrial company, the Board of Directors of the said company shall, within sixty days from the date of finalization of the duly audited accounts of the company for the financial year as at the end of which a company has become a sick industrial company, make a reference to the Board for Industrial and Financial Reconstruction for determination of the measures which shall be adopted with respect to the company. However, if the Board of Directors has sufficient reasons even before finalization of accounts to form an opinion that the company has become a sick industrial company, it shall, within sixty days after it has formed such an opinion, make a reference to the BIFR.

Moreover, SICA is basically and predominantly remedial and ameliorative in so far as it empowers the quasi judicial body, Board for Industrial and Financial Reconstruction to make appropriate measures for revival and rehabilitation of potentially viable sick industrial companies and for liquidation of non-viable companies. But, where the BIFR comes to the conclusion that it is not possible to revive the company and that it is just and equitable that the company should be wound up, it shall record and forward its opinion to the concerned High Court, on the basis of which the Court, may order winding up of the company and may proceed and cause to proceed with the winding up of the sick industrial company in accordance with the provisions of the Companies Act, 1956.

If a corporate debtor is in difficulty it is likely that he would approach the senior lenders for some rehabilitation, waiver of compound or penal interest, funding of the interest dues on a zero coupon rate or at concessional terms. It would prepare a scheme of arrangement or rehabilitation plan with the assistance of experts or an advisor, which it would submit, to the senior lenders.

RBI has police guidelines for revival of sick industrial companies and the role to be played by lead institutions or Operating Agencies appointed by the SICA for reviving industries declared to be sick under SICA. When a lender appoints an outside expert, the Court of the Board for Industrial & Financial Reconstruction (BIFR) would normally have to intervene to render help to such expert or advisor to collect information on an unrestricted basis. Depending upon the extent of the industrial sickness and the accumulated arrears or losses, it is likely that the records of the company would be in disarray. In such circumstances reconstruction of accounts on the basis of actual transactions is laborious and difficult to achieve. Large accounting firms render costly services and lenders are wary of appointing high cost expensive services in a rehabilitation scheme. Usually the lenders, if they are public financial institutions rely upon their own in-house expertise and staffing to ferret information.

Under the provisions of Companies Act, 1956, several measures have been prescribed for revival of a company. Even in the case of non-scheduled industries, not governed by Schedule I of the Industries (Development and Regulation) Act, 1951 and consequently, under the SICA; the provisions of Section 391 & 394 of the Companies Act for proposing a scheme of rehabilitation and reconstruction is normally recoursed.[3]

Sick Industrial Companies (Special Provisions) Act, 1985

Board for Industrial and Financial Reconstruction (BIFR)

The Legislation is basically and predominantly remedial and ameliorative in so far as it empowers the quasi judicial body, Board for Industrial and Financial Reconstruction (hereinafter also referred to as BIFR) to make appropriate measures for revival and rehabilitation of potentially viable sick industrial companies and for liquidation of non-viable companies.

Structure of BIFR

BIFR comprises of a Chairman and not less then two and not more than fourteen members and shall be persons who have been or are qualified to be High Court judges or are persons or ability and integrity and have special knowledge and professional experience of not less then fifteen years in the field of science, technology, economics, banking industry, industrial reconstruction, investment, law, labour matters, industrial finance, industrial management, accountancy, marketing, administration or any other matter.

 

Invoking Jurisdiction of SICA

SICA requires that when an industrial company has become a sick industrial company, the Board of Directors of the said company shall, within sixty days from the date of finalization of the duly audited accounts of the company for the financial year as at the end of which a company has become a sick industrial company, make a reference to BIFR for determination of the measures which shall be adopted with respect to the company. However, if the Board of Directors has sufficient reasons even before finalization of accounts to form an opinion that the company has become a sick industrial company, it shall, within sixty days after it has formed such an opinion, make a reference to the BIFR.

The Central Government or Reserve Bank of India or a State Government or a public financial institution or a State level financial institution or a scheduled bank may, if it has sufficient reasons to believe that any industrial company has become a sick industrial company under SICA, make a reference in respect of such company to the BIFR.

Companies Act, 1956

 An application to the court for the winding up of a company, can be by way of a petition presented  

• by the company ;
• by any creditor or creditors including;

        contingent or prospective

• by any contributory or contributories;
• by the Registrar of Companies;

in a case falling under Section 243 of the Companies Act,1956, by any person authorised by the central government in that behalf 

Chapter- IV    Procedure and Requirements

Registration of Reference

The reference filed by a sick industrial company or by any of the parties prescribed under SICA is registered by the Registry of  BIFR and notice is sent to all the secured creditors of the company, the State Governments and concerned statutory authorities.

Enquiry by BIFR

On a reference received, the BIFR may make such inquiry, as it may deem fit for determining whether the company has become a sick industrial company. If BIFR deems necessary or expedient so to do for the expeditious disposal of an inquiry, it may appoint any Operating Agency to enquire into and make a report with respect to such matters as may be specified in that order. If the BIFR comes to the conclusion that the company is not a sick industrial company, it shall reject the reference.

Preparation and sanction of scheme

If after making an inquiry about the sickness of the company, the BIFR is satisfied that a company has become sick, the BIFR shall decide whether it is practicable for the company to make its net worth exceed the accumulated losses within a reasonable time. If the BIFR decides that it is practicable for a sick company to make its net worth exceed the accumulated losses within a reasonable time, the BIFR shall give such company, such directions as it may deem fit to make its net worth exceed the accumulated losses.

• If the BIFR decides that it is not practicable for a sick industrial company to make its net worth exceed the accumulated losses within a reasonable time and it is necessary in the public interest to adopt remedial measures, it may direct any Operating Agency to prepare a scheme providing for such measures in relation to such company as it considers necessary from out of the parameters laid down under the Act.

• The Operating Agency, if possible, prepares a scheme providing, inter alia for any one or more of the measures – the financial reconstruction of the sick company by change in or take over of the management of the sick company; the amalgamation of the company with any other company; the sale or lease of a part or whole of any industrial undertaking of the sick company; the rationalisation of managerial personnel; such incidental, consequential or supplemental measures as may be necessary; change in Board of Directors etc.

Operating Agency

The Operating Agency acts as an extended arm of the BIFR. Generally, BIFR appoints any financial institution or bank on its panel to act as the Operating Agency. The role and responsibility of the Operating Agency is to, on the basis of the information furnished by the company and out of its own experience and expertise, prepare, if possible, a scheme for the rehabilitation of the sick industrial company in accordance with the guidelines set out by the BIFR and assist BIFR in the discharge of its functions.

Circulation / Sanction of scheme

• Where the scheme prepared by the Operating Agency relates to preventive, ameliorative, remedial and other measures with respect to any sick industrial company, it may provide for financial assistance by way of loans, advances or guarantees or relieves or concessions or sacrifices from the Central Government, State Government, any scheduled bank or other bank, a public financial institution or state level institution or any institution or other authority to the sick industrial company.
•  Every such scheme is required to be circulated to every person to provide financial assistance for its consent within a period of sixty days from the date of such circulation, If no consent is received, it is deemed that consent has been given and the BIFR shall sanction the scheme and on and from the date of such sanction, the scheme shall be binding on all concerned.  

• If the consent so required is not given, in that case the BIFR may adopt such other measures, including the winding up of the sick industrial company, as it may deem fit.

Though the statute does prescribe a time bound proceedings. However, invariably the time actually taken is far more. The proceedings from commencement of Liquidation till distribution of assets take nearly 3-4 years. 

In case of proceedings under SICA, it takes about 3-4 years and sometimes even more. In proceedings under SICA, claims as far as secured claims are concerned are recognized under SICA, Unsecured Creditors do not have a say in the matter of formulation and sanction of scheme but invariably a treatment is given to them in the scheme framed and the reliance is placed on the balance sheet of the company. 

There is no straightjacket formula. In liquidation proceedings, it all depends on realization of money from debtor and member of creditors in hand claiming a share in it. Under section 529 of Companies Act, 1956, proceeds are distributed on priority basis. It is difficult to point out the percentage but at times it would be difficult to receive even the principal sum due. Under SICA, the sacrifice taken by the secured creditors is by waver of interest, penal charges etc. and by reschedulement of the liability. However, since very few schemes have been successfully implemented, percentage of recovery out of SICA is negligible. 

Power to recover assets

In terms of the provisions of Section 22 of SICA , no proceedings for recovery of dues or execution and distress against any of the assets and properties of the Company can be initiated or can be continued with without permission of BIFR during the pendency of the reference filed by the Company before BIFR/AAIFR as the case may be. The operation of the provisions of Section 22 of SICA is automatic.  

Rights and liabilities of specific classes of parties 

(a)Corporate Directors 

• Under SICA, BIFR’s power can be invoked for the following misconducts viz,
1. Misapplication of money / property
2. Retention of money / property
3. Misfeasance
4. Malfeasance
5. Non-feasance
6. Breach of trust

• BIFR can order change in management under SICA while during winding up of companies under the Companies Act, management ceases to have any control after the appointment of the official liquidator.

(b) Secured Creditors 

Under SICA creditors of a sick company are prevented from enforcing their remedies in a court of law subject to stay or moratorium in the following classes of proceedings

1. Suit for recovery of money
2. Suit for enforcement of any security
3. Suit for enforcement of any guarantee in respect of any loan or advance granted to the company
4. Winding up proceedings
5. Execution against companies properties
6. Proceedings for distress against such properties
7. Similar other proceedings against such properties
8. Proceedings for appointment of receiver of such properties

 However the priority of claims does not get adversely affected

(c)     Unsecured Creditors 

• Similar provision as above apply in this case  

(d)   Workers  

In case of commencement of procedure under SICA, the rights of workers are taken care of under the scheme, if any for revival of the Company. The position of their dues is also taken into account and appropriate directions can be given. In case of liquidation of the Company the dues of the workers are treated on pari passu basis with that of the secured creditors.   

(e)Other creditors

No creditors of the Company can initiate any kind of legal proceedings against the Company or against the assets of the Company for recovery of its dues in case such Company is before BIFR/AAIFR under the provisions of SICA till pendency of such reference or till obtaining leave of BIFR/AAIFR to do so.  

In case of wind up of the Company, the dues of other creditors are taken into account only pursuant to the dues of the secured creditors and the dues of the workmen.  

Chapter- V    Matters specific to formal court-based reorganisations

(i)                 Under the provisions of SICA, as detailed in Para 6 above BIFR sanctions the scheme for rehabilitation of the Company. In preparation of Scheme, OA plays an important role.  

(ii)               During the formulation of scheme, it is the discretion of the lenders to continue to assist or stop assisting. BIFR does not have power and jurisdiction to direct release of assistance..   

(iii)             No fixed time limit is provided. However reasonable opportunity is granted. The time limit is decided by BIFR depending on their assessment of the possibilities and need to revive the company. 

(iv)             Under the provisions of SICA in case of formulation of a Scheme for rehabilitation/revival of a Company, such scheme is required to be circulated to every concerned person to provide financial assistance for its consent within a period of sixty days from the date of such circulation, If no consent is received, it is deemed that consent has been given and the BIFR shall sanction the scheme and on and from the date of such sanction, the scheme shall be binding on all concerned.

(v)               Each and every of the above must approved & the BIFR has to sanction and its approval is therefore must.

(vi)             If the consent so required is not given by any person required by the Scheme to provide financial assistance, in that case the Scheme is not sanctioned and BIFR may adopt such other measures, including the winding up of the sick industrial company, as it may deem fit.  

(vii)            BIFR may adopt such other measures, including the winding up of the sick industrial company, as it may deem fit.[4] 

Chapter- VI               Sick Industries and the Development of Laws

The trend in Anglo-Saxon countries is to impose some limits on creditors exercising their security so as to give borrowers a breathing space in which to seek rehabilitation. There are strong arguments for a limited period in which the borrower seeks to restructure. However, India has broader measures in the Sick Industries Companies (Special Provisions) Act 1985.[5] This legislation constitutes a Board for Industrial and Financial Reconstruction. The directors of an industrial company which has become sick must refer it to the Board; the government and banks may also refer the company. The Board can then inquire into the company: if the board decides that it is practicable for a sick industrial company to make its net worth positive within a reasonable time it must give it a period to do so, if not, it may direct reconstruction. The important point for present purposes is that if an inquiry is pending or a scheme is under consideration, all rights to security are stayed.[6] There are considerable delays in proceedings by the Board and the result is to block the exercise by many creditors of their rights to security.[7]

Like many countries, India inherited much of its basic law from England. The treatment of insolvent companies in India has largely been dealt with under the 1955 Companies Act of India, which was modeled on the English company legislation of 1948. There has been little or no change to it. Yet, early in the 1980s it was recognized in India that laws like this were not meant, and were not able, to deal with the systemic problems of financial disability, particularly in the industrial sector. In the absence of anything else, enterprises in financial difficulty struggled until they were eventually forced to cease production, close business, and be liquidated. In the industrial sector of India, this had a number of repercussions. It could have led to a shortage of supplies in important or critical economic areas, had a concertina effect on other enterprises, and led to extensive unemployment. None of this should appear as anything remarkable, for these types of 'flow on' effects of insolvency are now well recognized. It is remarkable, however, that this was the subject of much public concern in India at a time when some of these economic dimensions, although known, were only barely recognized in more fully developed economies. In 1981, the Reserve Bank of India appointed a special committee (it became known as the Tiwari Committee, after the name of its chairman) to examine the difficulties encountered in the rehabilitation of enterprises in financial difficulty and to suggest remedial measures, including changes in the law.

The work of the committee was largely focused on industrial enterprises whose financial affairs might be (and were) aptly described, as "sick." The definition adopted for such a "sick" industrial enterprise was one that had incurred losses in consecutive years and whose asset to liability ratio had deteriorated to below a minimum nominal standard of one to one.

In its report, the committee correctly observed that special legislation was needed to enable speedy and effective action to be taken to rehabilitate "sick units" by creating a specialized body devoted to their revitalization. The special committee subsequently recommended such action.

As a result, in 1985, the Sick Industrial (Companies Special Provisions) Act was enacted. Under that legislation, a Board for Industrial and Financial Reconstruction was established and given powerful administrative powers. The Act mandated that a "sick" company report its condition to the Board within sixty days of finalizing its audited accounts. In addition, a financial institution to which such a company was indebted had the power to make a report to the Board.

The Board was required to conduct an inquiry into the financial position of a reported company and determine whether the company might, within a reasonable time, recover or whether a scheme of rehabilitation should be proposed. Once a company was reported, a "moratorium" took effect, preventing the institution of civil proceedings or other action against the company or its assets without the consent of the Board.

The economic purpose of the legislation was made clear in the case of Navanit R. Kamani v RR Kamani.[8] The court observed that the primary purpose of the special legislation was "to promote speedy and efficient machinery so that a sick industry could be revived with utmost expedition, production could be started, locked up funds could be utilized for furthering socio-economic development." This, together with the 'regulatory' nature of the legislation, suggests that it was very much in conformity with a somewhat interventionist economic approach (Fabian socialism is one description that has been applied), of the Indian government. It also suggests that this branch of Indian insolvency law was very much "pro-debtor," another way to judge the economic influences that tends to shape an insolvency law.
Although this legislation was initially enacted with reference to the private sector, it was amended in December 1991 to enable public sector enterprises to be referred to the Board. Under the amendment, it became compulsory for a public sector enterprise to report its position to the Board once the minimum standard asset to liability ratio was triggered.

It appears that the Board has been reasonably active and successful in rehabilitating public sector enterprises. This success has more likely been the result of the establishment of a special fund in February 1992, helped by a $300 million loan from the World Bank, to assist with the problems of redundant employees in these enterprises. The fund has been used by the Board to promote early retirement and retraining schemes for redundant and displaced workers from the sick state enterprises.

At the central level, some fifty-five sick central enterprises had been referred to the Board by the end of 1994. They had aggregate accumulated losses of $3 billion U.S. dollars and over 250,000 employees. The special fund was used to pay off about 25% of these employees with early retirement schemes. Some of the enterprises were then fully restored to profitability, but the prospect of restoring many of them has been difficult. Despite the prescription to report a "sick" financial position, many of them did not publish accounts and were terminally ill before the Board became involved. The result has often been the write-off of government investment and/or loan funding in the enterprise to enable it to start afresh.

Despite these failures, the legislation is regarded as effective because it does expose, in a public way, under-performing state sector enterprises and ensures that the administrative law is applied.
The institution of the Regulatory Board in India might be compared to the policies and processes that were quickly developed to deal with the financially troubled state enterprise sector of the former East Germany, immediately prior to and following the reunification of Germany. Enterprises that were in a hopeless financial and production position were subjected to a concentrated, nonjudicial, administration that had only one aim--the possible conglomeration of a number of enterprises and the termination and disposal of the remainder as quickly and efficiently as possible.

This goal was achieved through specific legislation enacted in 1990 that set out the policies to be adopted. A powerful specialized administrative body (the Treuhandanstalt) was established to give effect to the legislation and its policies. The main responsibility of the Treuhandanstalt was to restructure state enterprises and either sell (privatize), merge, conglomerate, or liquidate them if restructuring and privatization did not appear possible.

The restructuring and privatization process followed this pattern:
• the first step was to incorporate all state enterprises by transforming them into companies in which the Treuhandanstalt was the sole shareholder. The Treuhandanstalt then installed supervisory boards of directors to each enterprise that reorganized the management structure. In addition, legal ownership of assets was transferred to the newly formed companies;
• the second step was to provide some limited temporary financial restructuring. About seventy percent of state enterprises required this temporary financial assistance. The techniques employed by the Treuhandanstalt included assuming continued interest liability on all debts, imposing a short term moratorium on old debt repayment, and making available new bank loans that were guaranteed by the Treuhandanstalt to give the enterprises much needed liquidity;
• the third step was to rewrite the balance sheets in accordance with standard international accounting requirements so they reflected true and reliable values of assets and liabilities, and exposed any economic weaknesses or risks of the enterprise;
• the fourth step was to require business plans from the enterprises that helped to facilitate further loans and to identify loss-making units within the enterprise which were then closed down;
• the fifth step was to recapitalize the enterprises. The recapitalization did not require the injection of fresh capital, but was accomplished by the Treuhandanstalt assuming liability for old debt;
• the sixth step was to breakdown enterprises which comprised a number of different production units. As a result more than 5000 new enterprises were created;
• the final step was to require the sale of excess or unused assets under the supervision of the Treuhandanstalt.

The process was, of course, inhibited by the need to reduce the excess workforces that were characteristic of the state enterprise system of the former East Germany. Among other things, this reduction required intensive job creation programs. Thus refreshed, the newly formed companies became marketable and were sold. All together some 14,500 enterprises have been privatized, either through partial privatization of a going concern business (about 50%), outright sale (about 30%), or partial sale.[9]

Sick Private Industries and Exit Policy

Whenever the question of closing down the sick industries is discussed, loss of employment gets undue emphasis. Actually, there are other components which also suffer-- shareholders, banks who have either invested or given loans; the entrepreneurs, and those who have supplied inputs. So the labour must accept that it is just another constituent of a whole unit and not the only one.
N. Sankar, President of the Associated Chamber of Commerce and Industry of India, quoted in the Fin. Express, New Delhi, Sept. 26, 1991.[10]
Failing private companies cannot close shop merely by a vote of the shareholders or directors. In India, "sick" units must apply to the Board for Industrial and Financial Reconstruction (BIFR). The BIFR decides whether the company can close down, or the Board may mandate another course of action in order to revive the failing company, which my include, for example, a loan from a government financial institution. The law and procedure for this process is set forth in the Sick Industrial Act., 1985. This act applies to all "scheduled" industries, which include almost all industries. [11]
Now, both domestic and foreign companies are demanding an "exit" policy that puts decision-making back into the hands of the company. The government has established a committee to examine this issue. Meanwhile, in hopes of more favorable regulations, many foreign businesses are delaying establishing companies in India until the exit policy issue is decided.[12] Despite protests from India's left parties, implementation of a new exit policy is expected soon. [13]

Chapter- VII     ANAYLSIS OF EXISTING LAWS 

1. Sick Industrial Companies (Special Provisions) Act, 1985

SICA has proved to be a complete failure with BIFR having failed to turn around sick companies. The performance of BIFR in reviving sick companies is woeful. Burdened with over Rs. 70,000 Crores of Non Performing Assets, the lenders find SICA to be the biggest obstacle to recover their dues. Only 254 companies had been revived till December, 2000- a measly 7 percent of the companies that approached the Board since 1985.  

The principal drawback of the existing legislation is that it has become a haven for defaulting companies. Erring debtors have misused SICA to seek protection and moratorium from recovery proceedings. The companies are easily able to enter into the reference, sometimes by manipulating their accounts to reflect net worth erosion and are then able to attract immunity against the recovery action by the creditors and this benefit is then attempted to be perpetuated. Registration of reference is dependent upon the erosion of net worth and this can be achieved by accounting manipulations. The provisions for suspension of legal proceedings are misused and perpetuated.   This problem arises due to the fact that unscrupulous promoters enter into the process of rehabilitation by manipulating sickness; take undue benefits arising out of delay in decision making of BIFR. If the reference is rejected, a fresh reference is filed with respect to accounts for the next year and the cycle goes on endlessly.   There is no fear of reprisal or punitive action against the companies indulging in this malpractice.  

Procedural and legal delays 

There is inherent delay both, procedural and legal in proceedings before BIFR.   The BIFR takes nearly one year to determine whether a company is sick. Thereafter, it takes around one year to formulate revival strategy. Consideration of the same also takes substantial time since banks and financial institutions have their own hierarchy in decision making, leading to avoidable delays and the decisions by the banks are also neither transparent, nor subject to judicial review.   There is gross lack of co-ordination between the banks inter se and banks and financial institutions and many a times the whole process is held up due to adamancy of one of them delaying the whole process of rehabilitation.   By the time decisions are taken and communicated, the plan, which had been conceived, has lost its viability resulting in failure of revival schemes even after sanction.[14] 

Defective policy for appointment of members to BIFR 

SICA has become a rehabilitation centre for retired bureaucrats. Rather then appointment of experts to BIFR and AAIFR, the Government has by and large filled up the positions by appointing retired and influential bureaucrats who have no experience and expertise of revival and rehabilitation of companies. 

The highest number of members in BIFR at a given point of time has not exceed fifty percent of its sanctioned strength. With a large number of companies approaching BIFR for revival in the last decade, inadequate strength of members of BIFR has contributed to delay in disposal of cases. 

Defective trigger point to invoke SICA jurisdiction 

The erosion of entire net worth is too late a stage to attempt restructuring. By the time net worth is eroded the company is too sick to be revived and has lost its resilience to restructure and revive itself.  

2. COMPANIES ACT, 1956

Lengthy procedures 

In India, the winding up of companies under the Companies Act, 1956 is a long drawn affair. Before a company is finally dissolved with the sanction of the court, it takes years in obtaining the statement of affairs, books of account, records and assets, realization of debts and sale of assets, settlement of list of creditors and contributories, distribution of assets to creditors, members etc.  In the process, substantial corporate assets remain unrealized and undistributed. The inordinate delay in proceedings mars the possibilities of rapid use of productive assets lying dormant throughout the country. This process has been found to be completely ineffective.  

Bureaucratization of winding up proceedings 

The process is hamstrung due to bureaucratization of the winding up process through the Liquidators who are usually Government Officers associated with this process.   The delay is also caused due to procedural delays in sale of assets and determination of amounts payable to the interested parties.   As such, there is no fear on the part of the debtor corporations that failure of rehabilitation scheme would result in any loss or prejudice to it.   This does not lead to any seriousness on the part of the management to succeed in the revival process.

Chapter- VIII                                     Conclusion 
In the process of deregulation and liberalization, number of restrictions on undertaking industrial activities has been withdrawn and relaxed. There is a need to take the process of liberalization a step further and recognize that so long as a company is acting in the interest of shareholders and otherwise observing the law of the land it should have the freedom to manage its affairs, merge, amalgamate, restructure and reorganize or otherwise plan its affairs as it considers best in the interest of the stakeholders. Interference by the Government or court or any tribunal should only be in the event of any detriment to the shareholders or under the Competition Act to prevent monopolies or restrictive trade practices. While undertaking reforms in the Insolvency Laws there is a need to change the focus from strict regulation of the activities of companies to granting freedom to the industry in conducting its business activities and lay down norms for protection of interest of stakeholders.

Summary of answers to the Research Question:

·         A scheme of rehabilitation would include rationalisation of managerial personnel, and so on. However, there are two sections of SICA which must be borne in mind. One, Sec. 18(1)(da), which states that rationalisation of managerial personnel, workers, and so on, in accordance with law, implying thereby that the various provisions of labour laws must be complied with in this context. And two, Sec. 32, which states that SICA provisions would override all other laws, except the FERA and ULCRA. Therefore, labour (laws) cannot be a sore thumb for rationalisation.

·         As in regards with the group financial assistance, for any rehabilitation scheme, in the normal course, the consent of financial institutions, lending bankers, and so on, would be required. Such consent should be given within 60 days from the date of circulation of the scheme or by such extended time which cannot go beyond another 60 days. If no reply is received within 120 days, the BIFR can proceed with the scheme as the consent in such cases is deemed to have been given.

·         A potentially sick company is required to hold a general meeting of the shareholders to consider the issue of such potential sickness. Such a general meeting should be held within 60 days from the date of finalization of the duly audited accounts. Sec. 23(1)(c) provides that shareholders can remove any director identified as responsible for the potential sickness. Members have a right to appoint new directors in the place of such removed directors. The removed directors are not entitled for any compensation.

However, in spite of Sec. 32 of SICA, which gives SICA overriding authority over the Companies Act, the removal of director appears to be an exercise essentially under Sec. 284 of the Companies Act, which in turn requires the procedure as laid down under Sec. 190 of the Companies Act to be complied with.

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[1]http://law.hku.hk/aiifl/research/April%202002/An%20Overview%20of%20the%20New%20Indian%20Insolvency%20Bill.doc. as visited on 24/09/05.

[2]http://law.hku.hk/aiifl/research/October%202002/Reply%20to%20the%20Insolvency%20Experts'%20Local%20Questionnaire%20-%20India.doc. as visited on 24/09/05.

[3] http://www.freearticlesforwebsites.com/articles/law/corporate-insolvency-laws-in-india/ as visited on 25/09/05.

[4]http://law.hku.hk/aiifl/research/October%202002/Reply%20to%20the%20Insolvency%20Experts'%20Local%20Questionnaire%20-%20India.doc. as visited on 24/09/2005

[5] Sick Industrial Companies (Special Provisions) Act s 22 (1985).

[6] Id.

[7] Ross Cranston, CREDIT, SECURITY AND DEBT RECOVERY: LAW'S ROLE IN REFORM IN ASIA AND THE PACIFIC, 39 St. Louis U. L.J. 759, (1995)

[8] MANU/SC/0343/1988

[9] Ronald Winston Harmer, INSOLVENCY LAW AND REFORM IN THE PEOPLE'S REPUBLIC OF CHINA, 64 Fordham L. Rev. 2563 (1996)

[10] Efficiency, Excellence, Exports--the Watchword, FIN. EXPRESS, New Delhi, Sept. 26, 1991, at 5, col. 1.

[11] "Scheduled" industries are those listed in the First Schedule to the Industries (Development and Regulation) Act, § 1(4) of the Act.

[12] Foreign Investors Await Better Bargain, FIN. EXPRESS, New Delhi, Nov. 22, 1991, at 1, col. 2.

[13] Rhonda Bershok, RELEASING THE TIGER? INDIA MOVES INTO THE GLOBAL MARKET, 4-FALL Int'l Legal Persp. 53(1992)

[14] http://www.legalservicesindia.com/articles/corin.htm as visited on 23/09/05.