Winding up of sick units: New Act to quicken process
The Companies Amendment Act, 2003 draws heavily on the relevant provisions of the Sick Industrial Companies (Special Provisions) Act, 1985, popularly known as SICCA that itself will soon be repealed.
AN ENACTMENT touted to facilitate, expedite revival, rehabilitation of sick industrial companies and if necessary to wind them up; and also to protect workers' interests.
Many powerful bastions of the Central Government, which used to literally terrorise the private sector in the hey-day of the pre-reformation era, are being pulled down one by one. The process started with the abolition of the office and post of the Controller of Capital Issues in 1992 ; the latest instance being the replacement of the Company Law Board (CLB) by a new National Company Law Tribunal (NCLT). The Companies Amendment Act, 2003 (the Amendment Act) draws heavily on the relevant provisions of the Sick Industrial Companies (Special Provisions) Act, 1985, popularly known as SICCA that itself will soon be repealed.
The Amendment Act which came into effect on January 3, is based on the recommendations of the Justice Balakrishna Eradi Committee set up to examine the law relating to insolvencies and winding-up of companies. It also "takes into account latest developments and innovations in corporate law and international practices.'' It is expected that the entire process of rehabilitation/winding-up of sick companies, which now takes about 20 years on an average, will be completed in about two years or so.
The speeding-up is sought to be achieved by the present multiciplicity of litigation before various courts or quasi-judicial bodies or forums CLB, BIFR and its appellate body AAIFR and High Courts giving way to the new NCLT together with its Appellate Tribunal. Civil courts have been barred from granting injunctions which would avoid unnecessary long-drawn civil suits. NCLT and the Appellate Tribunal are also not bound by the procedure laid down in the Code of Civil Procedure, but they will be guided by the principles of natural justice. NCLT has also been empowered to review its own orders. The Appellate Tribunal is to deal with appeals "as expeditiously as possible" and "endeavour to dispose them within six months from the date of receipt of the appeal". Any person aggrieved by a decision of the Appellate Tribunal, can file an appeal to the Supreme Court. So far so good; only time can tell whether the expectations of the Government will be fulfilled or belied.
Definition of `sick industrial company' widened
However, a worrisome factor is that the definition of a sick industrial company has now been widened to include under its ambit, companies which fail to repay its debts within any three consecutive quarters on demand for its repayment by a creditor or creditors of such companies. Before the Amendment Act, only high courts could act in prescribed circumstances. One of such circumstances where High Courts could act was when a company was unable to pay its debts, that is, when a creditor to whom the company owed a sum exceeding rupees five hundred, had served on it a demand for its payment within three weeks of such default. Prior to the Amendment Act all such cases were being handled by High Courts. These now will be heard and decided by NCLT-mercifully the paltry amount of rupees five hundred has been changed to a realistic rupees one lakh.
Interestingly, the prescribed circumstances, now include a new clause "if the company has acted against the interests of the sovereignty and integrity of India, the security of the State, friendly relations with foreign states, public order decency or morality.'' It is a moot point whether NCLT is the correct forum for adjudicating on this.
It might also be relevant to examine whether the provision in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance, promulgated in June 2002 (later regularised into an Act), enabling the taking over the assets of a defaulting borrower by the lender, without the intervention of court or tribunal will dilute the authority of NCLT.
Obstacle to good corporate governance
Another unhealthy amendment is that members of a potentially sick company need not be taken into confidence before a reference to NCLT by it. Prior to the 2003 amendment, SICCA required every such company to place before its members in general meeting, facts of erosion of net worth ( by 50%) and the reason therefor, and also report the fact of such erosion to BIFR, within 60 days of the finalisation of the audited accounts of the relevant financial year. The Amendment Act, on the other hand, requires sick companies to make a reference to NCLT along with a scheme for revival and rehabilitation and also along with a certificate from an auditor from the panel of the auditors prepared by NCLT, indicating the reason for the net worth of the company for being less than 50 per cent; or the default in repayment of its debt, making such a company into a sick company. The reference has to be made within 180 days extendable by another 90 days of the relevant facts giving rise to such reference, coming to be known. Thus the shareholders will now be completely bypassed and denied an opportunity to discuss the development and grill the directors. This goes against the grain of good corporate governance.
Protection of workers' interests
The second avowed reason for bringing in the Amendment Act, is to protect the interests of the workers during the period of sickness or of liquidation. This is sought to be done by the institution of a Rehabilitation and Revival Fund by collection of cess on the value of annual turnover of every company or its annual gross receipt, whichever is higher. It is not clear whether sick companies themselves, are liable to pay the cess. The Fund is to be applied for making interim payments of workers' dues pending revival or rehabilitation of a sick industrial company or during winding-up of an insolvent company; protection of assets of sick industrial companies, and revival and rehabilitation of such companies.
The aim is laudable but the means are not. Good efforts resulting in progress will be penalised to reward bad efforts resulting in sickness - a la recommendations of successive Finance Commissions for higher aid to States with poor records of performance by penalising States with proven track record through sustained efforts!
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