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Revival & Rehabilitation of Sick Companies under Companies Act 2013
23 Oct 2013

                             Revival& Rehabilitation of Sick Companies:

                               Chapter-XIX of the Companies Act, 2013

 

Distressed or Sick Company revival & rehabilitation related legal provisions in India have been made at par with developed countries under chapter XIX of The Companies Act 2013 section 253 to 269.  Earlier Sick Companies ( Special Provisions) Act 1985 was pro Promoters / Directors of the company but now it is Pro Creditors and much aggressive to revive the company. Sick company consultants like HPACS Consulting having experience to deal in Sick Companies or SICA 1985 are there to assist such companies. Explore at: http://www.hpacs.com/company_indian_services.html  

The very definition of the “Sick Company” has been changed completely. Instead of previous “ net worth erosion” to inability to pay dues to creditors within 30 days of the demand itself would prove that the company has become a sick company.

Other significant change is that now penal provisions are more stringent ranging up to 7 years jail or  Rs. 10 Lacks  fine or both, including disqualification of such directors to be so appointed in any company in India. Which was missing and delinquent directors were squeezing the resources of the company in their personal favour.

Other important and valuable development is that all the activities are time bound at each stage, whether determining the company as a sick company or sanction of revival of company or to wind up sick company all activities have to be completed within the stipulated time frame, including NCLT to deliver its order with the prescribed time.

The Sick Company Revival and Rehabilitation legal provisionsunder chapter XIX are as follows:

1.     Determination of Sickness of Company

As per section-253(1) of the Companies Act, 2013

Where on demand by the secured creditors representing 50% or more of its outstanding amount of debt, company fail to pay the debt within a period of 30 days from the date of notice of demand, any secured creditor may file an application to tribunal for determination of sickness of the company.

As per Section-253(2& 4)

The applicant (secured creditor) or company, may also make an application for determination of sickness and for the stay of any proceeding for the winding up of the company or; for execution, distress or the like against any property and assets of the company or; for the appointment of a receiver in respect thereof and that no suit for the recovery of any money or for the enforcement of any security against the company shall lie or be proceeded with.

The tribunal may pass an order which shall beoperative for 120 days

As per Section-253(5)

The Central Government or the Reserve Bank of India or a State Government or a public financial institution or a State level institution or a scheduled bank may, if it has sufficient reasons to believe that any company has become a sick company, make a reference in respect of such company to the Tribunal for determination of the measures which may be adopted with respect to such company:

As per Section-253(6),

Where an application under sub-section 1 or 4 has been filled the company shall not dispose of or otherwise enter into any obligation with regard to, its properties or assets except as required in the normal course of business the Board of Directors shall not take any steps likely to prejudice the interests of the creditors.

Section-253(7)says the Tribunal shall, within a period of 60 days of the receipt of an application under determine whether the company is a sick company or not.

As per section-253(8)& (9)

If the Tribunal is satisfied that a company has become a sick company, it shall, after considering all the relevant facts and circumstances of the case, decide, by an order in writing, whether it is practicable for the company to make the repayment of its debts referred to in sub-section (1) within a reasonable time.

The tribunal shall by order in writing give such time to the company as it may deem fit to make repayment of the debt.

2.     Application for Revival and Rehabilitation

As per Section-254(1)of the Companies Act, 2013

On determination of a company as a sick company by tribunal, any secured creditor of that company or the company; may make an application to the Tribunal; for the determination of the measures that may be adopted with respect to the revival and rehabilitation of such company.

Section-254(2)says the application as per sub-section 1 shall be accompanied by:

A.    A copy of the Audited Financial Statement relating to immediate preceding financial year.

B.     Prescribed fees and other documents which the applicant considers necessary for determination of measures of revival.

C.     A draft scheme of revival and rehabilitation.

Provided that where the sick company has no draft scheme of revival and rehabilitation to offer, it shall file a declaration.

As per Section-254(3)of the Act,

An application under Section 254(1) shall be made to Tribunal within a period of 60 days from the date of determination of the company as a sick company by the Tribunal under section 253.

3.     Exclusion of certain time in computing period of limitation

As per Section-255, the determining time period for any suit in the name and on behalf of a company, making an application to the Tribunal under sub-section (1) of section 253, for a determination to be declared as a sick company, the period during which the stay order as provided under sub-section (3) of section 253, was applicable shall be excluded.

4.     Appointment of Interim Administrator

As per section-256,on the receipt of an application under section 254, the Tribunal shall, not later than 7 days from such receipt:

a.       fixes a date for hearing not later than 90 days from date of its receipt

b.      appoint an interim administrator (PCS can be appointed) to convene a meeting of creditors to be held not later than 45 days from receipt of the order of theTribunal

c.       issue such other directions to the interim administrator as the Tribunal may consider necessary to protect and preserve the assets of the sick company

Interim administrator has to consider whether on the basis of the documents furnished and draft scheme filed, it is possible to revive and rehabilitate the sick company.

Interim administrator is to ascertain and submit a report to Tribunal, within 60 days from date of the order whether it is possible to adopt measures for the revival and rehabilitation of the sick company.

Where no draft scheme is filed by the company and a declaration has been made to that effect by the Board of Directors, the Tribunal may direct the interim administrator to take over the management of the company.

5.     Committee of Creditors

As per Section-257of the Companies Act, 2013:

The interim administrator shall appoint a Committee of creditors with not more than 7 members giving representation to each class of creditors.

The holding of the meeting of the committee of creditors and the procedure to be followed at such meetings, including the appointment of its chairperson, shall be decided by the interim administrator.

The interim administrator may direct any promoter,director or any key managerial personnel to attend any meeting of the committee and to furnish such information as may be considered necessary

6.     Order of the Tribunal

As per Section-258,

On the date of hearing fixed by the Tribunal and on consideration of the report of the interim administrator filed under sub-section (1) of section 256, if the Tribunal is satisfied that the secured creditors representing 3/4th in value of the amount outstanding against the sick company present and voting have resolved that:

      I.           “It is not possible to revive and rehabilitate such company”- Tribunal shall record such opinion and order that the proceedings for the winding up of the company be initiated.

   II.           “It is possible to revive and rehabilitate such company by adopting certain measures”- Tribunal shall appoint a company administrator for the company & cause such administrator to prepare a scheme of revival and rehabilitation.

 

7.     Appointment of Administrator

As per Section-259 of the Companies Act, 2013:

The interim administrator or the company administrator shall be appointed by the Tribunal from a data bank maintained by

·        the central government;

·        any institute or agency authorized bythe central government ; in a manner as may be prescribed consisting of thenames of company secretaries, chartered accountants, cost accountants and such other professionals

The terms and conditions of the appointment of interim and company administrators shall be such as may be ordered by the Tribunal.

8.     Duties of Company Administrator

As per Section-260 of the Act:

a.       The company administrator shall perform such functions as the Tribunal may direct.

b.      Company administrator shall prepare with respect to the company:

·        A complete inventory of all assets & liabilities and all books of account, registers, maps, plans, records,documents of title.

·        list of shareholders ,a list of creditors & a list of workmen of the company

·        a valuation report in respect of the shares and assets in order to arrive at the reserve price for the sale of any industrial undertaking of the company

·        an estimate of the reserve price, lease rent or share exchange ratio

·        proforma audited accounts of the company

9.     Powersof Company Administrator

      I.           To have an office at the registered office of the company

   II.           To visit all offices, branches, Godowns etc. of company.

 III.           To assess all information & inspect all books, papers, documents, registers of sick company.

 IV.           To issue notices to director, secretary,officers, manager, creditors etc. and call for all information needed

   V.           To obtain from any central or state government, court, tribunal copy of any document related to the company.

 VI.           To appoint experts with approval of Tribunal for ascertaining measures necessary for revival of company.

VII.           To apply to executive magistrate of the district for protection to safeguard assets, properties etc. of the sick company.

10.  Scheme of Revival & Rehabilitation

As per section-261

The company administrator shall prepare or cause to be prepared a scheme of revival and rehabilitation of the sick company after considering the draft scheme filed along with the application under section 254.

Scheme prepared in relation to any sick company may provide for any one or more of the following measures:

ü  The financial reconstruction of the sick company

ü  The proper management of the sick company by any change in, or by taking over, the management of such company

ü  The amalgamation of the Sick Company with another company

ü  Takeover of the sick company by a solvent company

ü  The sale or lease of a part or whole of any asset or business of the sick company

ü  The rationalization of managerial personnel, supervisory staff and workmen

ü  Repayment or rescheduling or restructuring of the debts or obligations of the sick company to any of its creditors or class of creditors

ü  Such other preventive, ameliorative and remedial measures

11.  Sanction of the Scheme

Section-262 of the Companies Act, 2013:

1.       The scheme prepared by the company administrator; shall be placed before the creditors of the sick company in a meeting convened for their approval by the company administrator within the period of 60 days from his appointment, the time may be extended by the Tribunal up to a period not exceeding 120 days.

2.      Company administrator shall convene separate meetings of secured and unsecured creditors & submit the scheme to the Tribunal;

ü       if scheme is approved by the unsecured creditors representing 1/4th  in value of the amount owed by the company;&

ü     the secured creditors representing 3/4th in value of the amount outstanding against financial assistance disbursed by such creditors

If scheme relates to amalgamation of sick company with other company; in addition to approval of creditors of sick company, the scheme shall be laid down in the general meeting of both companies

3.      Scheme prepared by administrator shall be examined by Tribunal & a copy of it with modifications ,if any, made by Tribunal shall be sent to sick company, company administrator & other company (in case of amalgamation) for suggestions;

Tribunal may publish or cause to be publish the draft scheme (in brief) in at least once in a vernacular newspaper in the principal vernacular of the district of the registered office of thecompany and at least once in English in an English Daily within 15 days prior to the date of hearing, for suggestions & objections

Complete draft scheme shall be kept at registered office of company.

The Tribunal may make such modifications, if any, in the draft scheme as it may consider necessary in the light of the suggestions and objections received.

4.      On the receipt of the scheme under sub-section (3), the Tribunal shall within 60 days there from, pass an order sanctioning the scheme.

5.      Where a sanctioned scheme provides for the transfer of any property or liability of the sick company to any other company; or where such scheme provides for the transfer of any property or liability of any other company in favour of the sick company; Such transfer shall be valid on and from the date of coming into operation of the sanctioned scheme.

6.      The Tribunal may review any sanctioned scheme and make such modifications, as it may deem fit, or may by order in writing direct company administrator, to prepare a fresh scheme

7.      The sanction accorded by the Tribunal under sub-section (4) shall be 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.

8.      A copy of the sanctioned scheme referred to in sub-section (4) shall be filed with the Registrar by the sick company within a period of 30 days from the date of receipt of a copy there of.

12.  Binding of the Scheme

Section-263 of the act says, on and from the date of the coming into operation of the sanctioned scheme, the scheme or such provision shall be binding on the sick company, the transferee company & any other company( in case of amalgamation) and also on its shareholders, creditors etc.

13.  Implementation of the scheme

As per Section-264 of the act,

·        The Tribunal shall modify or terminate any contract or obligation for the purpose of effective implementation of the scheme;

·        The tribunal may, by order in writing, authorize the company administrator to implement the scheme until its successful implementation on such terms as may be specified in the order & also require him to file periodic reports on the implementation;

·        Where it is difficult to implement the scheme or the scheme fails the company administrator, the company, the secured creditors, or the transferee company may make an application before the Tribunal for modification of the scheme or to declare the scheme as failed.

·        The Tribunal shall, within 30 days of presentation of an application, pass an order for modification of the scheme or declare the scheme as failed and pass order for winding up if the 3/4th in value of the secured creditors consents to such modification.

14.  Winding up of the company

As per Section-265 of the Companies Act, 2013

If the scheme is not approved by the creditors in the manner specified in sub-section (2) of section 262, the company administrator shall submit a report to the Tribunal within 15 days &; the Tribunal shall order for the winding up of the sick company in accordance with the provisions of Chapter XX.

15.  Power of Tribunal to assess damages against delinquent directors

As per Section-266,if during scrutiny of the scheme it appears to the Tribunal that any director, manager, officer or employee of the sick company who is or has been in employment of such company:

a.       Has misapplied or retained, or become liable or accountable for, any money or propertyof the sick company; or

b.      has been guilty of any misfeasance, malfeasance, non- feasance or breach of trust in relation to the sick company

The tribunal may, by order, direct him to repay or  restore the money or property, with or without interest, or to contribute such  sum to the assets of the sick company as compensation.

If the Tribunal is satisfied with respect to any person who is or was a director or an officer or other employee of the sick company, that such person by himself  had  diverted the funds for any purpose other than the purposes of company the Tribunal shall by order:

       i.           Direct public financial institutions, scheduled banks etc. not to provide, for a maximum period of 10 years from the date of order, any financial assistance to such a person or any firm of which such person is partner or any company in which such person is a director.

     ii.           To disqualify the said director,promoter, manager from being appointed as a director in any company for a maximum period of 6 years

16.  Punishment for certain offences

Section-267 says

Whoever violates the provisions of this Chapter or any scheme or; any order, of the Tribunal or the Appellate Tribunal or; makes a false statement or gives false evidence before the Tribunal or the Appellate Tribunal or; attempts to tamper with the records of reference or appeal filed under this Act shall be punishable with

·        Imprisonment for a term which may extend to 7 years

·        Fine which may extend up to 10 lakh rupees

17.  Bar of Jurisdiction

As per Section-268

No appeal shall lie in any court or other authority and no civil court shall have any jurisdiction in respect of any matter in respect of which the Tribunal or the Appellate Tribunal is empowered by or under this Chapter &; no injunction shall be granted by any court or other authority in respect of any action taken or proposed to be taken in pursuance of any power conferred by or under this Chapter.

18.  Rehabilitation and Insolvency Fund

As per section-269 of the act,

There shall be formed a Fund to be called the Rehabilitation and Insolvency Fund for the purposes of rehabilitation, revival and liquidation of the sick companies;

The Fund shall be managed by an administrator to be appointed by the Central Government.

There shall be credited to the fund from:

ü  Grants by Central Government;

ü  Income from investment of amount in fund

ü  Deposits by company

ü  Other Sources

A company which has contributed to the Fund shall,in the event of proceedings initiated in respect of such company under this Chapter or Chapter XX, may make an application to the Tribunal for withdrawal of funds not exceeding the amount contributed by it.

19.  Forms:

Forms

Particulars

 

Form-A

Application under sec-253(1) for the determination whether the debtor company is a sick company or not.

 

Form-B

Application under sec-253(2) if made after filing of Form-A

 

Form-C

Notice to debtor company before filing application to tribunal in Form-A

 

Form-D

The order of the tribunal declaring the debtor company as sick company (sec-253)

 

Form-E

Notice in newspaper after declaration of debtor company as sick company (sec-253)

 

Form-F

Application to Tribunal for determination of measures for revival and rehabilitation of the company under sec-254

 

Form-G

Draft scheme of revival & rehabilitation under sec-254

 

 

Form-H

Appointment of interim administrator under sec-256

 

Form-I

Notice of appointment of interim administrator in the newspaper (sec-256)

 

Form-J

Report of Interim Administrator under sec-256

 

Form-K

Notice of the meeting of the creditor

 

Form-L

Order of the Tribunal to wind up the sick company under sec-258

 

Form-M

Order of the Tribunal To appoint Company Administrator under sec-258

 

Form-N

Notice of appointment of company administrator to prepare a scheme of revival & rehabilitation in the newspaper under sec-259

 

Form-O

Notice for calling a separate meeting of the secured and unsecured creditors under sec-262(2)

 

Form-P

Application by company administrator to tribunal for sanctioning the Scheme of Revival & Rehabilitation  under sec-262

 

Form-Q

Advertisement in newspaper by the company administrator advertising the date & time of hearing of the application by tribunal and features the Draft Scheme.

 

Form-R

Order by the Tribunal sanctioning the scheme under sec-262(4)

 

Form-S

Application for modification of scheme or declaration of scheme as failed under sec-264(4)

 

Form-T

Report by the company administrator for checking whether the company is fit for winding up under sec-265(1)

 

Form-U

Challan for depositing amount by any company in the Rehabilitation and Insolvency Fund 269(2)(b)

 

Form-V

Challan for crediting amount to the Rehabilitation and Insolvency Fund from any other source under sec-269(2)(c)

 

Form-AA

Application to tribunal for withdrawing any amount from Rehabilitation and Insolvency Fund under sec-269(3)

 

 

Reader would appreciate that the current Sick Companies Revival and Rehabilitation provisions are much more progressive in the interest of the Creditors, Company, Promoters and nation as a whole where blocked capital would be unlocked at the earliest possible time.

For further guidance and assistance on the topic, you may contact the undersigned author of this article, who has dealt with more than 51 cases in BIFR. His profile is also available at  site. 

 

Author:

Hemant Paliwal

hemant@hpacs.com