SICK INDUSTRIAL UNIT

Meaning of Sick Industrial Unit

Sick industrial unit is defined as a unit or a company
(having been in existence for not less than five years)
which is found at the end of any financial year to have
incurred accumulated losses equal to or exceeding its
entire net worth. The net worth is calculated as sum total
of paid up capital and free reserves of a company less
the provisions and expenses, as may be prescribed. An
industrial unit is also regarded as potentially sick or weak
unit if at the end of any financial year, it has accumulated
losses equal to or exceeding 50 per cent of its average
net worth in the immediately preceding four financial
years and has failed to repay debts to its creditor(s) in
three consecutive quarters on demand made in writing
for such repayment.
Definition of Sick Industrial Unit
Sec. 2(46AA) of Companies Act 1956
"sick industrial company" means an
industrial company which has —
• the accumulated losses in any financial year
equal to fifty per cent or more of its average
net worth during four years immediately
preceding such financial year; or
• failed to repay its debts within any three
consecutive quarters on demand made in
writing for its repayment by a creditor or
creditors of such company.
 Causes of Industrial Sickness
The two basic factors which may result in
sickness of an industrial unit are:-

• Internal Causes

• External Causes
Internal Causes of Industrial Sickness
• Production
– Improper Location
– Wrong Technology
– Uneconomic plant size
– Unsuitable Plant & Machinery
– Inadequate emphasis on R & D
– Poor quality control
– Poor maintenance
• Finance
– Wrong Capital Structure
– Bad Investment Decisions
– Weak management Control
– Inadequate MIS
– Poor working capital management
– Strained relations with Investors
• Marketing
– Inaccurate demand projection
– Improper product mix
– Wrong product positioning
– Irrational price structure
– Inadequate sales promotion
– High distribution cost
– Poor customer service
• Human resources
– Ineffective leadership
– Inadequate human resources
– Overstaffing
– Poor organisation design
– Insufficient training
– Irrational Compensation
External Causes of Industrial Sickness
• Shortage of key inputs like power, basic raw materials.
• Changes in government policies with respect to excise
duties, custom duties, export duties, reservations etc
• Emergence of large capacity leading to intense
competition.
• Development of new technology
• Sudden decline in orders from government
• Shift in consumer preference
• Natural calamities
• Adverse international development
• Reduced lending by financial institutions
 Symptoms of Sickness
• Delay or default in payment to suppliers.
• Delay in payment to bank or financial
institutions.
• Non-submission of information to banks & FIs.
• Frequent requests to banks and FIs for
additional credit.
• Decline in capacity utilization.
• Poor maintenance of plant & Machinery.
• Accumulation of Inventories.
• Excessive turnover of personnel.
• Decline in the price of equity shares and
debentures.
 Revival of Sick Unit
When an Industrial Unit is identified as
sick, a viability study should be conducted
to assess whether the unit can be revived/
rehabilitated within a reasonable period. If
the viability study suggests that the unit
can be rehabilitated , a suitable plan for
rehabilitation must be formulated. If the
viability study indicates that the unit is
“better dead than alive” , steps must be
taken to liquidate.
 Revival Programme
A revival programme usually involves the
following:
• Settlement with Creditors
• Provision of Additional Capital
• Divestment and Disposal
• Reformulation of product-market strategy
• Modernization of Plant & Machinery
• Reduction in Manpower
• Strict control over cost
• Streamlining of Operations
• Improvement in managerial systems
• Workers Participation
• Change of Management
 SICK INDUSTRIAL COMPANIES
ACT, 1985
• Based on the recommendation of a Committee of Experts
under the Chairmanship of Shri [Link], 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

The objectives of this Act (SICA) as incorporated in its

preamble, emphasises the following points:

• The SICA had been enacted in the public interest to deal

with the problems of industrial sickness with regard to
the crucial sectors where public money is locked up.
• It contains special provisions for timely detection of sick
and potentially sick industrial companies, speedy
determination and enforcement of preventive, remedial
and other measures with respect to such companies.
• Those measures are to be taken by a body of experts.
• The measures are mainly
(a) Legal
(b) Financial restructuring
(c) Managerial
 IMPORTANT PROVISIONS OF SICA
• Constitution of two quasi-judicial bodies – BIFR and AAIFR and their Benches.
• Procedure of the Board and the Appellate Authority.
• Filing of references u/s 15 and criteria of sickness.
• Provision of enquiry u/s 16.
• Appointment of Special Directors and members u/s 16(4) and 17(3).
• Preparation of sanctioned scheme under section 17(2), 17(3) & 18(4).
• Provision for monitoring of schemes u/s 18(12)
• Rehabilitation by giving financial assistance u/s 19.
• Winding up of sick industrial companies u/s 20.
• Protection to safeguard the interests of the sick companies u/s 22(1), 22(2),
22(3).
• Provisions for dealing with potential sickness u/s 23, 23(a), 23(b).
• Provision in case of misfeasance u/s 24.
• Provision for seeking information and giving information – Central Govt., RBI,
FIs State institutions and sick companies and in case of amalgamation other
companies.
• Power to seek assistance of MMs & DMs u/s 29. SICA has overriding provisions
u/s 32 over other laws except the provisions of FERA, 1973 and the
ULCRA,1976. Penalty u/s 33 for violation of the Act.
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.
The role of BIFR as envisaged in the SICA (Sick Industrial
Companies Act) is:
(a) Securing the timely detection of sick and potentially sick
companies
(b) Speedy determination by a group of experts of the various
measures to be taken in respect of The sick company
(c) Expeditious enforcement of such measures
BIFR has a chairman and may have a maximum of 14 members,
drawn from various fields including banking, labour, accountancy,
economics etc. It functions like a court and has constituted four
benches.