Contents

CHAPTER-I..............................................................................................................................................2
INTRODUCTION:................................................................................................................................2
HISTORICAL BACKGROUND OF INDUSTRIAL SICKNESS:.....................................................................2
WHAT IS SICK INDUSTRIAL COMPANY?.............................................................................................3
CHAPTER-II.............................................................................................................................................5
REVIVAL AND REHABILITATION OF SICK INDUSTRIES........................................................................5
SYMPTOMS OF SICKNESS:..................................................................................................................5
CAUSES OF SICKNESS:........................................................................................................................6
SICK INDUSRIAL COMPANIES ACT, 1985:...........................................................................................8
OBJECTIVES OF SICA:.........................................................................................................................8
BOARD OF INDUSTRIAL AND FINANCIAL RECONSTRUCTION:............................................................8
PREPARATION AND SANCTION OF SCHEME FOR REVIVAL:.............................................................10
REHABILITATION BY GIVING FINANCIAL ASSISTANCE:.....................................................................11
RECOMMENDATIONS OF THE JJ IRANI COMMITTEE ON COMPANY LAW:......................................11
CHAPTER-III..........................................................................................................................................12
CORPORATE REHABILITATION.........................................................................................................12
ISSUES ARISING OUT OF IMPLEMENTATION OF SICA:.....................................................................12
CHAPTER-IV.........................................................................................................................................20
BAIL OUT TAKE OVER.......................................................................................................................20
Conclusion:......................................................................................................................................24

1
 CHAPTER-I
INTRODUCTION:
Industrial growth in India is guided by the Industrial Revolution of 1956.The problem
of industrial sickness has been growing at an annual rate of about 28% and 13% respectively
in terms of number of units and outstanding number of bank credit. It is reckoned that as of
today there are more than 2 lakh sick units with an outstanding bank credit of over Rs.7000
Crore nearly 29000 units are added to sick list every year. It seems that the deterioration of
the sick industries appears to be faster than the growth of sick industries.1

Industrial sickness especially in small-scale Industry has been always a demerit for
the Indian economy, because more and more industries like cotton, Jute, Sugar, and Textile
small steel and engineering industries are being affected by this sickness problem. There has
been an increase in industrial sickness, both in the large and small sectors, in India. Industrial
sickness affects not only the owners, employees and creditors but also causes wastage of
national resources and social unrest.2

HISTORICAL BACKGROUND OF INDUSTRIAL SICKNESS:

 Pre-Independence Position

Before 1947, the Indian economy was predominantly agricultural in nature. The
development of producers was almost negligible and was inadequate to meet the demands of
the market. Only those industries survived who served the interests of the British. There was
dearth of private players in the market. The market was unorganized because of the reluctant
attitude of the British and due to lack of proper communication facility as well as the shortage
of power. This issue was further aggravated with the lack of any proper bank or financial
institutions to finance the industrial projects. And, if at all, any help was available from the
money lenders, they charged exorbitant rates of interest along with arbitrary terms and
conditions. There was also minimal intervention of the Government in the promotion of the
industries. As a result, it was difficult for any trader to survive in the market on a long terms
basis. Also there were no proper implementation of any policy in regard to the efforts of the
Government in the revival and rehabilitation of sick industries.3

1
Balan K, Managing Industrial Sickness, 1st edition, Mittal Publications, 1996.
2
http://www.taxmann.com/taxmannflashes/flashart9-2-10_8.htm.
3
Bhaskar Amit, A Study Of Restructuring Of Sick Industrial Companies Under Part Via Of The Companies Act
Vis-A Vis Sick Industrial Companies (Special Provisions) Act,1985.

2
  Post-Independence Period

After the Constitution came into force, the primary aim was to convert India from a
colonial country to a socialist welfare society, as envisaged in the Preamble and the Directive
Principles of State Policy. The Government was prompted to go for rapid industrialization of
basic and heavy industries to convert India from agricultural to industrial economy. Soon, the
Government realized that a large number of units are turning sick. In order to check the
growth of the sick units, the Government adopted strategies to takeover of the sick industrial
units and restrict the problem if unemployment, labour unrest and social unrest. The
Government also took the initiative of taking over the management of sick industrial
undertakings for a brief period and returning it back to the owners once the sickness is
removed. The Government in its aim of preventing the growth of sickness was given support
by various agencies such as RBI, IDBI etc.4

WHAT IS SICK INDUSTRIAL COMPANY?

The concept of sick industrial concept has been embodied under section 2 (46 AA) of
the Companies Act, 1956 which defines it as follows:

Industrial company means an individual company which has:

i. The accumulated losses in any financial year equal to fifty percent or more of its
average net worth during four years immediately preceding such financial year equal
50% or more of its average net worth during four years immediately preceding such
financial year, or

ii. Failed to repay its debt within any three consecutive quarters on demand made in
writing for its repayment by a creditor or creditors of such company.

It has also been defined under Section 3(1) (O) of Sick industrial companies (special
provision amendment) Act, 1993 as follows:

An industrial company (being a company registered for not less than 5 years) which
has at the end of any financial year accumulated losses equal to or exceeding its entire net
worth.

4
A Study of Restructuring Of Sick Industrial Companies Under Part Via Of The Companies Act Vis-A Vis Sick
Industrial Companies (Special Provisions) Act, 1985. The article can be viewed at
http://employment.indlaw.com/search/articles/?3c5970ff-a184-4025-a14a-5de6182c55ee,last

3
 In the Companies Act 2013, Revival and Rehabilitation of Sick Industries is
mentioned under the sections 253 to 269.

The provisions of Sections 424A to 424L pertaining to Sick Industrial Companies and
within the meaning of Section 2(42AA), both under Companies Act, 1956, being in
consonance with the provisions of the Companies Act, 1985, in respect of interest on delayed
payments as contemplated in interest on delayed payments to small scale and Ancillary
Industrial Undertakings Act, 1993, and applicability of provision of one statute will not pave
way for applicability of the other, in view that the two different and distinct provisions
operate in separate field, Jay Engineering Works Ltd. vs Industry Facilitation Council.5

5
(2006) 8 SCC 677.

4
 CHAPTER-II
REVIVAL AND REHABILITATION OF SICK INDUSTRIES
Sickness in Industry in our country is a phenomenon, which has existed along with
healthy industrial enterprises. The approach to handle sickness in the industry has undergone
a gradual change. While earlier when the socialist approach was pre-dominant, the view
towards sick companies was that no sick company should be allowed to die or close down, as
employment shall be lost. In those times, efficiency of capital deployment, whether labour,
financial capital or any other resource was not the prime concern, but providing employment
was the main objective of our planners.

During the 1980s, the Government of India had set up The Industrial Reconstruction
Corporation of India (IRCI) to provide financial assistance to Sick Units, to enable them to
revive under their then existing structure. Later it was converted to The Industrial
Reconstruction Bank of India (IRBI), to carry the same function under a different mould.
Now this has undergone further metamorphosis and has been re-christened as The Industrial
Investment Bank of India (IIBI), with no obligation to fund the sick industries. In the year
1985 The Sick Industrial Companies (Special Provisions) Act 1985 was enacted with an
objective to provide assessment of viability to sick companies in the private sector.

This concept of Revival and Rehabilitation of Sick Industries is being taken forward
under the proposed amendment to the Companies Act 1956 by the Amendment/Second
Amendment Act 2002 in that a viable unit may be allowed to revive while an inherently sick
company should be wound up and should not be a drag up on the national resources.

SYMPTOMS OF SICKNESS:
Timely action is required for identification of sickness. For this we need to analyse
the symptoms which would help us identify the sickness of the unit. This can be traced from
the signals that get displayed by the sick units. The signal may be in the form of financial
distress starting with short term liquidity problems, revenue losses, operating losses and
moving in the direction of over use of external credit until it reaches a stage where it is
overburdened with debt and not being able to generate sufficient funds to meet its
obligations.6 In case of large units whose shares are quoted in stock exchanges, a signal of
sickness is sent when dividends are skipped and share price sharply declines. This measure,
therefore, will have to be used very cautiously with other identifiable symptoms to judge

6
Prof (Dr.) Sreerenganadhan K, Miss Varghese Roshna, Management of Industrial Sickness

5
whether skipping dividends indicates sickness or represents a temporary downward slide in
financial performance.7 The existence of these signals and symptoms provides a ground for
suspecting that the industrial unit concerned is prone to sickness.

CAUSES OF SICKNESS:8
Some industries are born sick; sickness is thrust upon some, 9 while others become
sick due to a number of causes. The general belief is that the incidence of sickness results
from the changing economic factors and the external influence, which tilt the economic
viability.10 The causes of sickness may vary from one unit to another. But the most common
causes of sickness can be grouped under two heads internal and external. In India, the Tiwari
Committee in its report outlined the causes of sickness into several heads. They can be
classified as:

A. Internal Causes - These are those factors which are within the internal control of the
management. Sickness arises because of the disorder of the following concerns:
Planning:
a. Technical feasibility: Inadequate technical know-how, locational disadvantage, out-
dated production process.
b. Economic Viability: High Cost of Inputs, uneconomic size of project, under
estimation of financial requirements, unduly large investment in fixed assets, over-
estimation of demand.
Implementation:
a. Cost over-runs resulting from delays in getting licenses/sanctions etc., inadequate
mobilization of finance.

7
Dholakia H Bakul, Industrial Sickness in India: Weed for Comprehensive Identification Criteria. The article
can be
viewed at http://www.vikalpa.com/pdf/articles/1989/1989_apr_jun_19_24.pdf,
8
According to the Tiwari Committee, 14 per cent of the large sick units suffered from technical factors and
faulty initial planning. So they mentioned the causes.
9
This happens due to change in Government policy, over-spending on essentials, absence of control on
borrowings, dishonest practices on the part of the management, etc.
10
See, Balan K, Managing Industrial Sickness, 1st edition, Mittal Publications, 1996

6
Production:
a. Production management: Inappropriate product mix, poor quality control, high cost
of production, lack of adequate timely and adequate modernization, high wastage,
poor capacity utilization.
b. Labour management: Excessive high wage structure, inefficient handling of labour
problems, excessive manpower, lack of trained/skilled component personnel.
c. Marketing management: Dependence on limited number of customers, poor sales
realization, defective pricing policy, weak market organization, lack of market
feedback and market research, lack of knowledge of marketing techniques.
d. Financial Management: Poor resource management and financial planning, liberal
dividend policy, application of funds for unauthorized purposes, deficiency of funds,
over-trading, inadequate working capital, lack of effective collection machinery.
e. Administrative Management: Over centralization, lack of professionalism, lack of
feedback to management ( management information system), lack of adequate
controls, lack of timely diversification, excessive expenditure on R&D, incompetent
and dishonest management.

B. External Causes:

a. Infrastructural bottlenecks: Non-availability/irregular supply of critical raw materials or

other inputs, chronic power shortage, transport bottlenecks.

b. Finance Constraints: Another external cause for the sickness of SSIs is lack of finance.
This arises due to credit restrains policy, delay in disbursement of loan by govt., unfavourable
investments, fear of nationalization.

c. Government control, policies, etc. Government price controls, fiscal duties, abrupt
changes in Government policies, procedural delays on the part of the financial/licensing/other
controlling or regulating authorities (banks, RBI, financial institutions, Government
departments, licensing authorities, MRTP Board).

d. Marketing Constraints: The sickness arrives due to liberal licensing policies, restrain of
purchase by bulk purchasers, changes in global marketing scenario, excessive tax policies by
govt. and market recession.

e. Extraneous factors: Natural calamities, political situation (domestic as well as

international), war, sympathetic strike, multiplicity of labour unions.

7
 The Government taking into consideration all the factors resulting into industrial
sickness, accepted the recommendations of the Tiwari Committee with some modification,
and thus, the Sick Industrial Companies (Special Provisions) Act, 1985 was, accordingly
enacted.

SICK INDUSRIAL COMPANIES ACT, 1985:

Based on the recommendation of a Committee of Experts under the Chairmanship of
Shri T.Tiwari, the Government enacted a special legislation named as the Sick Industrial
Companies (Special Provisions) Act, 1985 commonly known as SICA. The Board of
Industrial and Financial Reconstruction (BIFR) and the Appellate Authority for Industrial and
Financial Reconstruction (AAIFR) were also established in 1987 to look after the matters
covered under the purview of SICA. SICA was further amended in 1991 to bring government
Companies under its purview and again in 1993 certain changes were brought out in the act
for the determination of industrial sickness. Hence, in short, we can conclude that the main
objective of SICA is to determine sickness, expedite the revival of potentially viable units
and effect closure of unviable units.

OBJECTIVES OF SICA:
 To evaluate the techno-economic viability of sick industrial companies with a view to
either to rehabilitate them, if the public interest so demanded and their rehabilitation
was possible, or to close them down, if continuing them would be impossible.
 To stop continued drain of public and private resources for the overall economy of the
country.
 To protect employment as far as possible. In the case of Testeels Limited &
Arvindbhai N. Talti vs. Radhaben Ranchhodlal Charitable Trust & Testeels
Limited,11 it was held that SICA had been enacted to safeguard the economy of the
country and protect the viable sick units.

BOARD OF INDUSTRIAL AND FINANCIAL RECONSTRUCTION:

Board of industrial and Financial Reconstruction (BIFR) was established by the
Central Government, under section 3 of the Sick Industrial Companies (Special provisions)
Act, 1985 and it became fully operational in May, 1987. BIFR deals with issues like revival
and rehabilitation on sick companies, winding up of sick companies, institutional finance to
sick companies, amalgamation of companies etc. BIFR is a quasi-judicial body.

11
1988 INDLAW GUJ 54.

8
The role of BIFR as envisaged in the SICA (Sick Industrial Companies Act) is:

 Securing the timely detection of sick and potentially sick companies

 Speedy determination by a group of experts of the various measures to be taken in
respect of The sick company
 Expeditious enforcement of such measures.

BIFR has a chairman and may have maximum of 14 members,12 drawn from various
fields including banking, labour, accountancy, economics etc.13 it functions like a court and
has constituted four benches.

Mukand ltd. vs Mukand Staff and Officers Association14

Since the appellant-Company has become a potentially Sick Industrial Company with
the meaning of Section 3(1) (o) of the Act of 1985, arising out of an erosion of more than
50% in the peak net worth of the company in the four preceding years on the basis of the
audited financial results as contemplated under Sections 227 (2) and (3) of the Companies
Act, 1956, for the financial year 2002-2003, the company is required under the provisions
Section 23 of the Act of 1985, to report the fact of such erosion to the Board for industrial
and Financial Reconstruction within sixty days from the date of finalisation of the duly
audited accounts of the company for the financial year 2002-2003 and also to take further
actions specified in the said provisions.

United Bank of India vs Official Liquidator, High Court of Calcutta15

Board for Industrial and Financial Reconstruction within the meaning of Section 4(1)
of the Act of 1985, and Section 3(b) of Board for Industrial and Financial Reconstruction
Regulations, 1987, is within the definition of the expression ‘Judicial Authority’ in Section 5
of Arbitration and Conciliation Act, 1996.

12
Section 4(2) of SICA,1985
13
Section 4(3) of SICA, 1985
14
(2004) 10 SCC 460.
15
(2000) 5 SCC 274.

9
PREPARATION AND SANCTION OF SCHEME FOR REVIVAL:
Once a company has been found sick, the BIFR may grant time to the sick company
to enable it to make its net worth positive and bring the company out of sickness, without any
external financial assistance. If it is found infeasible for company to make its net worth
positive without any external financial assistance, or if the BIFR decides that the company
cannot make its net worth positive within a reasonable time, then the Board appoints an
operating agency under section 17(3) of the Act, then the operating agency is required to
prepare and submit a schedule in respect of the referred company by providing any or more
of the following measures:

 Financial Reconstruction of the sick industrial company;

 The proper management of the sick industrial company by change in, or takeover of,
the management of the sick industrial company;
 Amalgamation with another company or vice-versa;
 Sale or lease of its undertaking;
 Rationalization of its staff;
 Any other preventive or remedial measures; and
 Incidental or consequential measures.

The revival package may vary from case to case depending on the nature of the
problem and may include additional financial assistance, postponement of recovery of loan
already lent by banks and financial institutions, change in management, amalgamation, and
sale of redundant assets, lease of assets or any other suitable measure. The revival package
should be submitted to the BIFR within a time limit of 90 days or such extended period as
may be granted by the BIFR.

Maharashtra Tubes Ltd. vs State Industrial and Investment Corporation of Maharashtra

Ltd16

In the course of pendency of inquiry within the meaning of section 16 or in respect of

preparation/sanction of scheme as contemplated in section 17, or pertaining to appeal under
Section 25, respectively, of the Act of 1985, proceedings under Section 29 and section 31 of
state Financial Corporations Act 1951, within the purview of the expressionproceedings for

16
(1993) 2 SCC 144.

10
the winding-up, execution, distress or the like, thus proceedings under the Act of 1951 stands
barred by applicability of Section 22(1).

REHABILITATION BY GIVING FINANCIAL ASSISTANCE:

On submission of the revival package by the operating agency, the BIFR sends the
revival package in a draft form to all the interested parties (i.e., the sick industrial company,
the banks/ financial institutions who have given financial assistance to the sick company, the
operating agency, the transferee company (if there is a recommendation in the revival
package for amalgamation) etc., eliciting their views/suggestions on the revival package. The
BIFR will also publish particulars of the draft revival package in newspapers inviting
suggestions/objections, if any, from the shareholders of the sick company, creditors and
employees of the sick company, Transferee Company and any other interested party. On
receipt of views/suggestions/objections on the draft revival scheme, the BIFR may, if deemed
fit; afford an opportunity to the interested parties to be heard. After careful examination of all
the aspects, the BIFR will sanction the revival scheme with or without any modifications.

RECOMMENDATIONS OF THE JJ IRANI COMMITTEE ON COMPANY LAW:17

JJ Irani Committee wanted to omit the term ‘sick industrial company’ and replace it
with ‘insolvent company’ and thereby erase the sickness test on the basis of erosion of net
worth with that of the liquidity test. Moreover, it recommended that CA/CS/CWA/law
professionals should play an active role in the insolvency process so that there would be
expertise persons dealing with the specialized, commercial and technical characteristics of
insolvency law. It also recommended the establishment of the National Company Law
Tribunal on a speedy basis. Further, it enunciated that the rehabilitation by cess to be replaced
by the ‘Insolvency Fund” with optional contribution by companies. It also allowed the
debtors to approach the Tribunal with the rehabilitation scheme. Power was also given to the
creditors to oppose the scheme of rehabilitation. 18

 http://www.mahavirlunawat.com/html/[2005]061SCL0047(MAG).html, last accessed on 24th October, 2009.

17

http://www.luthra.com/Admin/presentations/Images/Risks%20and%20Strategies%20of%20Bankruptcy
18

%20MA%20-%20An%20Indian%20Perspective.pdf, last accessed on 24th October, 2010.

11
 CHAPTER-III
CORPORATE REHABILITATION
India started her quest for industrial development after independence in 1947. The
industrial policy resolution of 1948 marked the beginning of the evolution of the Indian
Industrial Policy; and thereafter with the economic and social development there has been
shift in the industrial policy from the directed and regulated economy in the 1948 and 1956
Policy Resolution, to the free market economy in 1991. During the initial years, there was
also the problem of industrial sickness entailing social costs in terms of loss of production
and un-employment and waste of capital assets. The problem of industrial sickness and its
consequential fall out on the nation’s economy and also the problem faced by financial
institutions (which have invested much of the public funds in such industries) in the matter of
recovery of their dues and the rehabilitation of the sick industrial company led to enactment
of the Sick Industrial Companies (Special Provisions) Act, 1985. 19

ISSUES ARISING OUT OF IMPLEMENTATION OF SICA:

The functioning of SICA has not been found to be satisfactory as many issues have
been identified during its implementation. Some of the deficiencies were restrictive definition
of “sickness” under the Act and belated cognizance thereof by BIFR, slow pace of BIFR
intervention, excessive protection to sick industries under Section 22 of the Act providing for
automatic stay of all legal proceedings, necessity of consensus amongst secured creditors
before finalization of revival scheme, lack of monitoring of sanctioned revival schemes, and
delay in winding up of sick companies. Apart from these, frequent appeal to High Courts
against the decisions/ orders of the BIFR was also one of the factors responsible for delay in
timely disposal of the cases.20

There are also some more reasons. Such as:

 Procedural delays.
 Lack of Timely Commencement of Proceedings.
 Misuse of Protection against Recovery Proceedings.21

So due to this the Sick Industries Companies Act, 1985 has been repealed and under the
new Companies Act i.e., The Companies Act 2013, some provisions regarding the sick

19
Taxman’s new law relating to Sick Companies by D.P. Mittal 2003 edition.
20
Reference taken from mergers and acquisition by sampath, 2008.
21
Sourced from: http://www.dnb.co.in/Arcil2008/SARFAESI.asp.

12
industries have been inserted in the chapter XIX (section 253 to section 269). This chapter
has much wider impact then earlier Act of 1985.

SICK COMPANIES (SUB – SECTION 1 OF SECTION 253):

Where on a demand by the secured creditors of a company representing fifty percent

or more of its outstanding amount of debt, the company has failed to pay the debt within a
period of thirty days of the service of the notice of demand or to secure or compound it to the
reasonable satisfaction of the creditors, any secured creditor may file an application to the
Tribunal in the prescribed manner along with the relevant evidence for such default, non-
repayment or failure to offer security or compound it, for a determination that the company
be declared as a sick company.

A company which fail to pay or secure a debt, which is fifty percent or more of its
total outstanding debt, within thirty days of demand notice it may be declared as sick
company.

DETERMINATION OF SICKNESS (SECTION 253):

The demand for payment or to secure or to compound such debt shall be made by
secured creditors only. On failure of the company to fulfil the demand to pay or to secure to
compound, any secured thereafter may file an application to the Tribunal. The application
shall be accompanied with relevant evidence for such default, non – payment or failure to
offer security or compound the debt.

Where, a debt is already secured but secured creditors demand further security
because of erosion of value of current security, this provision attracts.

STAY OF ANY PROCEEDING (Sub – Section 2 of Section 253):

The applicants (creditors) may also make an application for the stay of any proceedings:

a. for winding up of the company, or

b. for execution, distress or the like against any property and assets of the company, or
c. for appointment of a receiver in respect of any property and assets of the company, or
d. for enforcement of any security against the company.

The tribunal may pass an order for stay of these proceedings. This order shall be
operative for a period of one hundred and twenty days.

13
APPLICATION BY COMPANY (Sub – Section 4 of Section 253):

A company may also file an application before the Tribunal to declare it a sick
company and also for stay of proceedings discussed above.

REERENCES FOR DETERMINATION AS SICK COMPANY (Sub – Section 4 of

Section 253):

Further, on sufficient reason to believe that any company become a sick company; the
Central Government, or the Reserve Bank of Indian, or the State Government, or a public
financial institution, or a state level institution, or a schedule bank may also file reference
before the Tribunal. A reference shall not be made in respect of any company by:

a. the Government of any State unless all or any of the undertakings belonging to such
company are situated in such State;
b. a public financial institution or a State level institution or a scheduled bank unless it
has, by reason of any financial assistance or obligation rendered by it, or undertaken
by it, with respect to such company, an interest in such company.

PROTECTION OF CERTAIN INTERESTS (Sub – Section 6 of Section 253):

Where an application for determination as a sick company or by the company for stay
of proceedings:

a. the Company shall not dispose of or otherwise enter into any obligation with regard to
its properties or assets;
b. the Board of directors shall not take any steps likely to prejudice the interest of the
creditors.

Any action in the normal course of business is permitted.

TIME-PERIOD FOR DETERMINATIO (Sub – Section 7 of Section 253):

The tribunal shall, within a period of sixty days of the receipt of any application,
determine whether a company is a sick company or not. The company shall be given a notice
of the application and a reasonable opportunity to reply to the notice within thirty of the
receipt of the notice.

14
REPAYMENT OF DEBT (Sub – Section 8, 9 of Section 253):

If the Tribunal is satisfied that a company has become a sick company, the Tribunal
shall by an order decide, whether the company may make repayment of its debt within a
reasonable time.

Where Tribunal determine that it is practicable for the sick company to pay its debt
within a reasonable time, the Tribunal shall, by order in writing shall give a time period to
make repayment of the debt.

APPLICATION FOR REVIVAL AND REHABILITATION (Section 254):

Once a company is determined as a sick company by the Tribunal, any secured

creditor of the company or the company itself may make an application to the Tribunal for
determination of measures for revival and rehabilitation of the company.

Such reference shall abate (i.e. fade away or decline) if the secured creditors
representing three – fourths in value of the amount outstanding against financial assistance
disbursed to the borrow have taken measures to recover their secured debt under sub –
section (4) of Section 13 of the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest (SARFAESI) Act, 2002.

No reference shall be made if the secured creditors representing three – fourths in

value of the amount outstanding against financial assistance disbursed to the borrower have
taken measure to recover their secured debt under sub section (4) of Section 13 of the
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest
(SARFAESI) Act, 2002.

No such application shall be made without consent of the securitisation or

reconstruction company, where the financial assets of the sick company had been acquired by
such Securitisation Company or reconstruction company under sub section (1) of the Section
5 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security
Interest (SARFAESI) Act, 2002.

15
Application for Revival and Rehabilitation:

An application shall be accompanied by:

a. audited financial statement of the company relating to the immediately preceding

financial year;
b. such particulars and documents, duly authenticated in such manner, along with such
fee as prescribed; and
c. a draft scheme of revival and rehabilitation of the company in prescribed manner.

Where the sick company has no draft scheme of revival and rehabilitation to offer, it
shall file a declaration to that effect along with the application. The application for revival
and rehabilitation shall be made to the Tribunal within a period of sixty days from the date of
determination of the company as a sick company by the Tribunal.

SCHEME OF REVIVAL AND REHABILITATION (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.

The scheme may provide any one or more of following measures, namely:

a. the financial reconstruction of the sick company;

b. the proper management of the sick company by any change in, or by taking over,
the management of such company;
c. the amalgamation of the sick company with any other company; or any other
company with the sick company;
d. takeover of a part or whole of my asset or business of the sick company;
e. the sale or release of a part or whole of any asset or business of the sick company;
f. the rationalisation of managerial personnel, supervisory staff and workmen in
accordance with law;
g. such other appropriate preventive, ameliorative and remedial measures;
h. repayment or rescheduling or restructuring of the debts or obligations of the sick
company to any of its creditors or class of creditors;

16
 i. such incidental, consequential or supplemental measures as may be necessary or
expedient in connection with or for the purpose of the measures specified in above
clauses.

SANCTION OF SCHEME (SECTION 262):

The scheme prepared by the company administrator shall be place before the creditors
of the company in a meeting for their approval within the period sixty days from his
appointment. This period of sixty days may be extended up to one hundred twenty days.

Approval in Meetings:

The company administrator shall separate meetings of secured and unsecured

creditors. If the scheme is approved by (a) unsecured creditors representing one forth in value
of the amount owed by the company and (b) secured creditors representing three forth in
value of the amount outstanding against financial assistance disbursed to the company; the
company administrator shall submit the Tribunal for sanctioning the scheme.

Where the scheme relates to amalgamation of the sick company with any other
company, the scheme shall also be approved by a special resolution in general meetings by
shareholders of both companies. Only after this approval, the scheme shall be proceeded
with.

Examination by Tribunal:

The scheme prepared by the company administrator shall be examined by the

Tribunal. If, there is any modification, the Tribunal shall send the draft to the sick company
and the company administrator. In case of amalgamation, the scheme shall also be sent to
other company under the amalgamation. The Tribunal may publish or cause to be published
the draft scheme in brief in daily newspapers for suggestions and objections.

The complete draft scheme shall be kept at the place where registered office of the
company is situated or at a place mentioned in the advertisement.

In light of suggestions and objections received, the Tribunal may make such
modifications as it may consider necessary. The sick company, company administrator,
amalgamating company, and any shareholder or creditor or employee of these companies
may submit suggestions and objections.

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Approved Scheme:

After satisfying that the scheme had been validly approved, the Tribunal shall within
sixty days from the receipt of the scheme, pass an order sanctioning such scheme. Yes, this is
practically a challenge for all parties concerned.

The sanction accorded by the Tribunal 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. A copy of the sanctioned scheme
certified in writing by an officer of the Tribunal to be a true copy thereof shall in all legal
proceedings be admitted as evidence.

A copy of the sanctioned scheme shall be filed with the Registrar by the sick company
within a period of thirty days from the date of receipt of a copy thereof.

Properties and Liabilities:

Where a sanctioned scheme provides for the transfer of any property or liability of the
sick company to any other company or person or where the scheme provides for the transfer
of any property or liability of any other company or person in favour of the sick company,
then, by virtue of, and to the extent provided in, the scheme, on and from the date of coming
into operation of the sanctioned scheme or any provision thereof, the property shall be
transferred to, and vest in, and the liability shall become the liability of, such other company
or person or, as the case may be, the sick company.

Review of Scheme:

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 providing for such measures as the company administrator may consider necessary.

WINDING UP OF COMPANY ON REPORT OF COMPANY ADMINISTRATOR

(SECTION 265):

If the scheme is not approved by the creditors, the company administrator shall submit
a report to the Tribunal within fifteen days and the Tribunal shall order for winding up of the
sick company and conduct the proceeding with the provision of Chapter XX of the
Companies Act, 2013.

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SCHEME TO BE BINDING (SECTION 263):

On and from the date of the coming into operation of the sanctioned scheme, the
scheme shall be binding on the sick company, transferee company or such other company and
also on employees, shareholders, creditors and guarantors of said companies.

 IMPLEMENTATION OF SCHEME (SECTION 265):

The Tribunal shall, for the purpose of effective implementation of the scheme, have
power to enforce, modify or terminate any contract or agreement or any obligation pursuant
to such agreement or contract entered into by the company with any other person.

The tribunal may by order in writing authorise the company administrator to

implement a sanctioned scheme till its successful implementation. The Tribunal may require
company administrator to file period reports on implementation of the sanctioned scheme.

Where the whole or substantial assets of the understanding of the sick company are
sold under a sanctioned scheme, the sale proceeds shall be applied towards implementation of
the scheme in a manner as directed by the Tribunal. The debtors and creditors shall have the
power to scrutinise and make appeal for review of the value before final order of fixing value.

Where it is difficult to implement the scheme for any reason or the scheme fails due to
non-implementation of obligations under the scheme by the parties concerned, the company
administrator may make an application before the Tribunal for (a) modification of the scheme
or (b) to declare the scheme as failed and that the company may be wound up. Where there is
no company administrator; the company, secured creditors or transferee company may make
the application.

The Tribunal shall pass an order within thirty days of presentation of the application
with the consent of secured creditors holding three fourths in value of secured credit.

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 CHAPTER-IV

BAIL OUT TAKE OVER

The Securities and Exchange Board of India (Substantial Acquisition of Shares and
Takeovers) Regulations, 1997, provides for “Bail Out Take Over” from Regulations 30 to 37.

1. The provision shall apply to a substantial acquisition of shares in a financially weak

company not being a sick industrial company, in pursuance of a scheme of
rehabilitation approved by a public financial institution of a scheduled bank (herein-
after referred to as “the lead institution”).
2. The lead institution shall be responsible for ensuring compliance with the provisions
of this Chapter.
3. The lead institution shall appraise the financially weak company taking into account
the financial viability, and assess the requirement of funds for revival and draw up the
rehabilitation package on the principle of protection of interests of minority
shareholders, good management, effective revival and transparency.
4. The rehabilitation scheme shall also specifically provide the details of any change in
management.
5. The scheme may provide for acquisition of shares in the financially weak company in
any of the following manner :
a. outright purchase of shares, or
b. exchange of shares, or
c. a combination of both.

Provided that the scheme as far as possible may ensure that after the proposed
acquisition the erstwhile promoters do not own any shares in case such acquisition is made by
the new promoters pursuant to such scheme.

Explanation.—For the purpose of this Chapter, the expression “financially weak company”
means a company, which has at the end of the previous financial year accumulated losses,
which has resulted in erosion of more than 50 per cent but less than 100 per cent of its net

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worth as at the beginning of the previous financial year that is to say of the sum total of the
paid-up capital and free reserves.

Manner of Acquisition of Shares:

Regulation-31:

1. Before giving effect to any scheme of rehabilitation the lead institution shall invite
offers for acquisition of shares from at least three parties.
2. After receipt of the offers under sub-regulation (1), the lead institution shall select
one of the parties having regard to the managerial competence, adequacy of
financial resources and technical capability of the person acquiring shares to
rehabilitate the financially weak company.
3. The lead institution shall provide necessary information to any person intending to
make an offer to acquire shares about the financially weak company and
particularly in relation to its present management technology, range of products
manufactured, shareholding pattern, financial holding and performance and assets
and liabilities of such company for a period covering five years from the date of
the offer as also the minimum financial and other commitments expected of from
the person acquiring shares for such rehabilitation.

Manner of Evaluation of Bids:

Regulation-32: 

1. The lead institution shall evaluate the bids received with respect to the purchase price
or exchange of shares, track record, financial resources, and reputation of the
management of the person acquiring shares and ensure fairness and transparency in
the process.
2. After making evaluation as provided in sub-regulation (1), the offers received shall be
listed in order of preference and after consultation with the persons in the affairs of
the management of the financially weak company accept one of the bids.

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Person Acquiring Shares to make an Offer:

Regulation-33:

The person acquiring shares who has been identified by the lead institution under sub-
regulation (2) of regulation 32, shall on receipt of a communication in this behalf from the
lead institution make a formal offer to acquire shares from the promoters or persons in charge
of the affairs of the management of the financially weak company, financial institutions and
also other shareholders of the company at a price determined by mutual negotiation between
the person acquiring the shares and the lead institution.

Explanation: Nothing in this regulation shall prohibit the lead institution offering the
shareholdings held by it in the financially weak company as part of the scheme of
rehabilitation.

Person Acquiring Shares to Make Public Announcement:

Regulation-34:

1. The person acquiring shares from the promoters or the persons in charge of the
management of the affairs of the financially weak company or the financial
institution shall make a public announcement of his intention for acquisition of shares
from the other shareholders of the company.
2. Such public announcement shall contain relevant details about the offer including the
information about the identity and background of the person acquiring shares, the
number and percentage of shares proposed to be acquired, offer price, the specified
date, the date of opening of the offer and the period for which the offer shall be kept
open and such other particulars as may be required by the Board.
3. The letter of offer shall be forwarded to each of the shareholders other than the
promoters or the persons in charge of the management of the financially weak
company and the financial institutions.
4. If the offer referred to in sub-regulation (1) results in the public shareholding being
reduced to 10 per cent or less of the voting capital of the company, the acquirer shall
either:
a. within a period of three months from the date of closure of the public offer,
make an offer to buy out the outstanding shares remaining with the

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 shareholders at the same offer price, which may have the effect of delisting
the target company; or
b. Undertake to disinvest through an offer for sale or by a fresh issue of capital
to the public which shall open within a period of six months from the date of
closure of the public offer, such number of shares so as to satisfy the listing
requirements.
5. The letter of offer shall state clearly the option available to the acquirer under sub-
regulation (4).
6. For the purposes of computing the percentage referred to in sub-regulation (4), the
voting rights as at the expiration of twenty days after the closure of the public offer
shall be reckoned.
7. While accepting the offer from the shareholders other than the promoters or persons
in charge of the financially weak company or the financial institutions, the person
acquiring shares shall offer to acquire from the individual shareholder his entire
holdings if such holding is up to hundred shares of the face value of rupees ten each
or ten shares of the face value of rupees hundred each.

Competitive bid:

Regulation-35:

No person shall make a competitive bid for acquisition of shares of the financially
weak company once the lead institution has evaluated the bid and accepted the bid of the
acquirer who has made the public announcement of offer for acquisition of shares from the
shareholders other than the promoters or the persons in charge of the management of the
financially weak company.

Exemption from the operations of Chapter III:

Regulation-36: 

1. Every offer which has been made in pursuance of regulation 30 shall be accompanied
with an application to the Board for exempting such acquisitions from the provisions
of Chapter III of these regulations.
2. For considering such request the Board may call for such information from the
company as well as from the lead institution, in relation to the manner of vetting the
offers evaluation of such offers and similar other matters.

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 3. Notwithstanding grant of exemption by the Board, the lead institution or the acquirer
as far as may be possible, shall adhere to the time limits specified for various
activities for public offer specified in Chapter III.

Acquisition of Shares by a State Level Public Financial Institution:

Regulation-37:

Where a proposal for acquisition of shares in respect of a financially weak company is

made by a State level public financial institution, the provisions of these regulations insofar
as they relate to scheme of rehabilitation prepared by a public financial institution, shall apply
except that in such a case the Industrial Development Bank of India, a corporation established
under the Industrial Development Bank of India Act, 1964 (10 of 1964), shall be the agency
for ensuring compliance with these regulations for acquisition of shares in the financially
weak company.

Conclusion:
Industrial sickness is a problem all economies big and small have to face. What is
important is to evolve a proper regulatory and institutional mechanism to deal with the
situation. While there should be a mechanism to safeguard the interests of workers, a suitable
exit policy for the non-viable units should form an integral part of the new approach. A
stringent mechanism should also be devised so that the directors of the company should not
play fraud on the unit to bring it within the purview of sickness. NCLT should also be made
to come into force to ensure speedy disposal of cases looking into the sluggishness of the
disposal of cases by BIFR.
The approach of the government towards rehabilitation of a sick unit being very
selective, the government is now convinced that there is no point in throwing away further
resources in support of the units which are irretrievably sick. Only such units which are found
to be potentially viable need to be taken up for formulation of rehabilitation packages to
restore them to health. Package consisting of concessions from banks, financial institutions,
government (Central/State), government agencies, shareholders, labour, and suppliers of
goods should be provided to those units where chances are subsisting for the revival of the
sick unit.
Though SICA was conceived well, unfortunately it has not only failed to reduce
sickness, but also the spread of industrial sickness. Really, it is an accepted fact that some
corporate deaths are inevitable aspects of market-oriented economy. In the above

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background, when we analyse the existing laws, we note that while SICA meets with and
incorporates most of the essential features required in restructuring laws, it has proved to be
not very effective and has also lent itself to misuse.

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 BIBILIOGRAPHY

BOOKS
 Law and procedure for Merger /joint ventures amalgamations takeovers &corporate
restructure by K.R. SAMPATH, published by Ketan Thakkar, 2005.
 Evolution of Indian Economy & elementary Statistics BY Goswami, published Delhi
publication, 2009
 Information India: 1993-94 : global view, BY J. C. Aggarwal, published by Eastern
Book Company lucknow,2007
 Verbal Ability &Reading Comprehension BY Sharma , 3rd edition, 2008
 Privatision and labour restructuring by Gopal Ganesh – 2nd edition, Delhi law
publication,2008 
 Corporate restructuring: enhancing the shareholder value BY Ranjan Das, Udayan
Kumar Basu
ARTICLES
 Revival and restructuring of sick/loss making cp
 Revival and restructuring of sick units
 Sick industries revival, rehabilitation from singhal & co
 Industrial development policy & public sector
 Rehabilitation of Sick industries
WEBSITES
 www.legalserviceindia.com
 www.dpe.nic.in/survey01/vol1/chap19.pdf
 www.lexvidhi.com Article Corporate Law
 www.kbs14.en.busytrade.com//Sick-Industries-Revival-rehabilitation.htm
 www.dhi.nic.in/dhi.acheivements.pdf
 www.agratacorp.com/sick.aspx
 www.education.nic.in/cd50years/15/8p/HX/8PHX0901.htm
 www.employment.indlaw.com/search/articles
 www.scribd.com › How-To Guides/Manuals › Crafts
 www.newagepublishers.com/samplechapter/000922

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