Industrial sickness : Causes and remedies** 

By Ajit Kumar '*'

Sickness in industry is a universal phenomenon .According to one estimate there are five lac sick units in small scale sector and one lac in the medium and large scale sector. Over Rs. 75000 crores of banks and financial institutions funds are locked up in these units.
Sickness is not defined in precise terms in the various Acts. Sickness is a symptom of ailment and not an ailment in itself. Sickness of physical body indicates that some part of the body or the organ is not functioning normal and requires diagnosis. Thus defining sickness in absolute terms has been slightly a tedious job. Defining sickness in industry is still a tough exercise. There has been no standard definition of sickness in industry and probably whatever exists or has been stated as sickness is not definition of sickness but the existence of various parameters which, if present, would indicate that the industrial unit is sick. The financial institutions pay reliance on the· following parameters for the categorisation of the unit in the sick category.
1. Continuous default in repaying the dues of industry.
2. Continuous default in repaying the instalments which have fallen due.

3. Continuous losses.

"Cash-loss" is a fairly acceptable term and stands for the losses before providing depreciation. A unit may not incur cash losses yet it may make default in paying the institutional dues. A unit may be incurring cash losses on a continued basis yet the promoters of the project might be resourceful enough that they might be pumping in additional funds and paying the dues of the institutions in time. The situation thus becomes analogous i.e. a unit which is making cash losses is paying the dues because the promoters are resourceful and a unit which is generating cash accruals is committing default; say due to temporary liquidity problems. Hence the parameters of industrial sickness, as defined above, also do not provide any foolproof yardstick .for measuring sickness.
In this connection reference is invited to the Sick Industries (Special Provisions) Act 1985. As per provisions of the Act a Company may be declared sick if it is registered for seven years; it has accumulated losses which are equal to the net worth of the Company; and if it has incurred cash losses during the financial year in which the reference to Board is made and the year preceding the financial year. Thus the occurrence or cash loss i.e. loss after. deducting depreciation should be for 2 years.
For the purpose of this paper, it is assumed that "Sick Unit" is not a new unit, it has consistently made revenue and cash losses for a number of years, it finds its share capital eroded and needs drastic action to revive it. At the outset it needs to bring out the fact that sickness is not merely a financial phenomenon consisting of losses which can be made good by pumping additional funds to clear all dues. It requires deeper and detailed analysis of the cause which led to the situation.
The Purpose of this article is to know why companies become sick particularly public sector under­takings, what remedial steps should be taken to prevent the chances of companies becoming sick. This paper does not pretend to provide a comprehensive treatment of the subject it raises a few pertinent issues and hopefully provides material for thinking.
Here the fact should not be glossed over that efforts to deal effectively with industrial sickness have so far been largely unsuccessful, is beyond dispute. Only a very small proportion of sick units have been successfully revived.
Sickness concerns the Govern­ment, employees, bankers and others having direct contact with the company. However it is also a national problem in as much as companies which consistently make losses result, inter-alia in:
a. Under utilisation of productive capacity.
b. Lack of product demand.
c. Loss of revenue in various forms of indirect taxes.
d. Over Staffing.
e. Possible loss of exports.
The industrial sickness can be due to many factors such as:-
a. Bad strategy and policy.
b. No diversification, product obsolescence.
c. Company went into new project which was badly conceived.
d. Delays in execution of new
project.
e. Poor organisation and staffing.
f. No modernisation.
g. Old and expensive manufacturing process.
h. Poor Marketing Organisation
1.Inadequate emphasis on
marketing as opposed to selling.
J. Did not change from seller's to buyer's market
k. Lack of any formal Planning, especially financial planning.
1. Wrong Capital Structure
What steps should a company and all concerned with it Government, management and bank should take to revive a sick undertaking. A comprehensive study of the under­taking problems and preparing a composite plan of action must be the starting point of the exercise. Piece­meal and adhoc solutions are rarely adequate. What is needed is a detailed assessment of the comp~ny's existing situation and future prospects covering corporate strategy, Investment, markets, organisation, productivity, labour relations, profitability and finance. An undertaking is ostensibly sick because it is short of working capital and systems have not kept pace with its growth, therefore receiving funds alone will not help. Fortunately, revival is possible in a majority of cases, if timely action is taken and revival programme is implemented with sincerity and commitment.
The old Jute mills and textile mills became sick because they were not modernized, technology were not upgraded. Due to rising costs, the operations of these units became unviable. Eventually, the units became sick. Some of the blue chip companies of today are sick units of yesteryear. Take the case of Goldline. now better known as LG. At one point of time everyone wrote off the company and but thanks to revival efforts of new management LG not only recovered from sickness but grew in a spectacular way. At one stage, Apollo Tyre, Tata Tea HMV etc. were among the sick units. But the Management did not lose heart. They revived them with a clear vision and suitable st(ategies. Unfortunately managements of several undertaking think wrongly that once they get funds, the undertaking can be revived. However, as mentioned in the beginning, providing funds, without attending to the underlying causes of sickness could be throwing money into a bottomless pit. From . the long list of possible causes of sickness it will be apparent that the
single most important cause of sickness is ineffective management. Well managed undertaking can even overcome and deal effectively with difficulties which are due to external factors such as poor demand for the industry's products. Therefore what a sick undertaking needs more than anything else or its revival is a good and stable management. In particular, the undertaking should ensure that it has the full time chief executive. Also the other key posts such as Finance Director and Heads of other functions or division should be properly manned. There is unfortunately inadequate mobility of Managers in our country. Therefore where there are inadequacies in managerial talent attracting good people from outsid~ to a sick undertaking is difficult. However, this is a problem which has to be faced. Some people may be attracted by the challenge which the sick units provide. Management is one area where a sick undertaking should not try to economise. The Board of Directors of Indian Public under­takings are amongst the most ineffective in this area. This is in many cases due to fact that they have part time ex-office Directors nominated by the State or Central Govt. They devote more time te their regular duties and a very little time, if at all, on policy matters of the undertakings. The need for an effective Board is particularly strong when the undertaking is in poor health.
An other important consideration which arises is how does Govern­ment maintain take control over management of undertaking which has been financed largely by it to which several concessions in the form of interest reduction, conver­sion of debt into equity etc. As mentioned above, direct involvement by the Government in the manage- . ment of undertaking is not desirable mainly because they do not have capabilities in industrial manage­ment. Some financial institutions have worked towards building up a pool of senior Managers on their pay­roll who could be assigned to sick undertaking for limited periods of say I to 3 years. This is easy to achieve. Probably the best way to ensure control is through control over equity share holding, constitution of the board and leaving .the actual management to carefully chosen professional managers who are both competent and independent. A sick undertaking like a sick patient needs quick action to restore its health. Every day of delayed action means loss of contribution, increase in cash losses, interest, loss of credibility with suppliers and customers and lowering of staff morale. Once a detailed and comprehensive plan of action has been prepared and viability of the unit established, early action by all concerned is imperative. In practice one finds numerous delays which can be attributed to principal shareholders, Banks, Management, Government and labour.
The delays in obtaining funds from Banks and Financial institutions need particular mention because it is funds that the undertaking needs more than anything else, at least in the short term.
However, the management (including the Board) of undertaking are perhaps even more to blame because they have often not prepared a comprehensive plan of action. Also the boards of directors and Government are found to pay scant attention ·to the manning of top management posts. The banks being business institutions, therefore do not know how precisely they are going to revive the undertaking and improve its ability to repay loans and keep up with interest payments.
When an undertaking becomes sick, several agencies are involved in the revival exercise, Central or State Govt. as the case may be, Board of Directors, Managements, Banks, Financial institutions and labour unions. To get them all to act fast in the interests of the undertaking is not an easy task but it is nevertheless essential to prevent the situation from deteriorating. Skilful financial management during sickness is important and there may be need for reconstruction of capital. The comprehensive study discussed earlier should culminate in short term and long term cash projections and once they are reviewed and accepted, actual performance would need to be carefully monitored. A Financial reorganisation may involve some sacrifices by the creditors and shareholders of the undertaking which can be in several forms:-
1. Reduction of the par value of shares.
2. Reduction in rates of interest.
3. Postponement of maturity of debt.
4. Conversion of debt into equity.
5. Change in the nature of claim or obligation such as from secured to unsecured.
6. Concession by the Government in the form of reduction or waiving of indirect taxes, electricity dues etc.
While sickness among companies in private and public sector has become wide spread, regretfully it is stated that enough research has not been done in developing schemes of financial reconstruction in the Indian environment. Needless to add that the academic and professional institutes could play useful role in this regard.
A great deal more is required to be done to revive sick undertaking than is being done today, in particular one could be more systematic about it and act faster. However, in an extreme case, if viability can not be clearly established, a sick under­taking should be allowed to die peacefully.

*ACMA Former CFM ITI Ltd.

** Published in “The Management Accountant" The Institute of Cost Accountant Magazine

 Provisions of SICA to prevail over Companies Act even after a winding up order is passed: Supreme Court

The three-Judge Bench of the Supreme Court of India in the case of Madura Coats Limited ("the Appellant")vs. Modi Rubber Ltd. (the Respondent") and Ors., decided on June 29, 2016, has observed that the winding up proceedings before the Company Court cannot continue after a reference has been registered by the Board for Industrial and Financial Reconstruction ("BIFR") and an enquiry has been initiated under Section 16 of the Sick Industrial Companies (Special Provisions) Act, 1985 ("SICA").

Company Court had passed winding up order against the Respondent and official liquidator was also appointed to take charge of the assets of the Respondent and to submit a report along with the inventory. The Board of Directors of the Respondent had passed a resolution to file a reference before the BIFR under the provisions of SICA and after due procedure, reference to BIFR was registered. It is pertinent to note that while the application for reference was sent to the BIFR before the winding up order was passed by the Company Court, the reference was actually registered with the BIFR after the winding up order was passed by the Company Court. Thereafter, BIFR sanctioned the rehabilitation scheme under SICA, also making provision for unsecured creditors (including the Appellant). Some payment was also made by the Respondent to the Appellant pursuant to an order of the Company Court.

The Division Bench of the Allahabad High Court ("HC") had allowed the Special Appeal of the Respondent and had stayed further proceedings before the Company Court till a final decision was taken on the reference made by the Respondent to the BIFR. This decision of HC was under challenge before the apex Court.

The Supreme Court considered different situations that can arise in the interplay between the Companies Act and the SICA in the matter of winding up of a company, looking at its earlier rulings.

According to the Supreme Court, this appeal from HC decision was squarely covered by the primacy given to the provisions of the SICA over the Companies Act as delineated in its earlier rulings namely, Real Value Appliances Ltd. v. Canara Bank and Rishabh Agro Industries Ltd. v. P.N.B. Capital Services Ltd. The apex Court also took note of the subsequent developments in the case and the fact that the Appellant had participated before the BIFR and had taken its dues in terms of the rehabilitation scheme.

The Supreme Court observed that whatever may be situation, whenever a reference is made to the BIFR under Sections 15 and 16 of SICA, the provisions of SICA would come into play and they would prevail over the provisions of the Companies Act. Court affirmed the view taken by the HC in concluding that the winding up proceedings before the Company Court cannot continue after a reference has been registered by the BIFR and an enquiry initiated under Section 16 of SICA.

VA View

Adding to the significant rulings in the past by the Supreme Court on this issue, this is yet another judgment pronouncing its stance on the issue concerning primacy of SICA over the Companies Act in certain cases. By this ruling, the apex court has affirmed its ruling in the case of Tata Motors Ltd. v. Pharmaceutical Products of India Ltd, (2008) 7 SCC 619, making it clear that, different situations can arise in the process of winding up a company under the Companies Act but whatever be the situation, whenever a reference is made to the BIFR under Sections 15 and 16 of the SICA, the provisions of the SICA would come into play and would prevail over the provisions of the Companies Act and proceedings under the Companies Act must give way to proceedings under the SICA.

II. Minimize interference with arbitration process as that is the forum of choice: Delhi High Court Division Bench

The Delhi High Court (Division Bench) ("the Delhi HC") in the case of Mcdonald's India Private Limited("McDonald") vs. Vikram Bakshi ("Vikram") and Ors. (collectively "the respondents), decided on July 21, 2016, has observed that Courts should minimize interference with arbitration process, which is the policy discernible from the Arbitration and Conciliation Act, 1996 ("Arbitration Act").

McDonald, Vikram and the McDonald's Corporation, U.S.A. entered into a joint venture agreement ("JVA") for setting up and operating McDonald's restaurants initially within the National Capital Region of Delhi on a nonexclusive basis. Essentially, the agreement was between McDonald and Vikram and, McDonald's Corporation, U.S.A. was a confirming party. The Delhi HC referred to relevant clauses of the JVA and the major developments that took place after the execution of JVA. The crux of the dispute was that McDonald wanted to exercise call option under the JVA as Vikram ceased to be the Managing Director of a company incorporated pursuant to provisions of JVA ("said company"). The Company petition before the Company Law Board ("CLB") came to be filed by Vikram and another alleging oppression and mismanagement against McDonald and seeking reinstatement of Vikram as the Managing Director of said company. An order was passed by CLB directing McDonald to maintain status quo over the shareholding, board pattern and right of call option. Thereafter, McDonald terminated the JVA and instituted arbitration proceedings in the London Court of International Arbitration. By an order of the Single Judge of the Delhi High Court, McDonald was restrained from pursuing the arbitration proceedings until, inter alia, the status quo order passed by CLB was vacated.

The contention of the respondents was that arbitration proceedings at London would be vexatious and oppressive. Several case laws on this and related points were discussed by the Delhi HC. The Delhi HC observed that unless and until a party seeking an anti-arbitration injunction can demonstrably show that the arbitration agreement is null and void, inoperative or incapable of being performed, no such relief can be granted in the suit or as an interim measure therein. The Delhi HC was of the view that the finding of the learned single Judge that the arbitration agreement in the present case is incapable of performance or inoperative because of the pendency of the proceedings in the CLB was not sound. According to the Delhi HC, even if it was assumed that Part I of Arbitration Act was to apply, then also, because of the provisions of Section 8 of the Arbitration Act, the judicial authority was obliged to refer the parties to arbitration, as, the Delhi HC noted that, there is now a mandate to refer the parties to arbitration unless the court finds that prima facie no valid arbitration agreement exists.

The Delhi HC finally concluded that the circumstances of invalidity of the arbitration agreement or it being inoperative or incapable of being performed did not exist in this case and observed, "Courts must be extremely circumspect and, indeed, reluctant to thwart arbitration proceedings. Thus, while courts in India may have the power to injunct arbitration proceedings, they must exercise that power rarely and only on principles analogous to those found in sections 8 and 45, as the case may be, of the 1996 Act."

 Provisions of SICA to prevail over Companies Act even after a winding up order is passed: Supreme Court

The three-Judge Bench of the Supreme Court of India in the case of Madura Coats Limited ("the Appellant")vs. Modi Rubber Ltd. (the Respondent") and Ors., decided on June 29, 2016, has observed that the winding up proceedings before the Company Court cannot continue after a reference has been registered by the Board for Industrial and Financial Reconstruction ("BIFR") and an enquiry has been initiated under Section 16 of the Sick Industrial Companies (Special Provisions) Act, 1985 ("SICA").

Company Court had passed winding up order against the Respondent and official liquidator was also appointed to take charge of the assets of the Respondent and to submit a report along with the inventory. The Board of Directors of the Respondent had passed a resolution to file a reference before the BIFR under the provisions of SICA and after due procedure, reference to BIFR was registered. It is pertinent to note that while the application for reference was sent to the BIFR before the winding up order was passed by the Company Court, the reference was actually registered with the BIFR after the winding up order was passed by the Company Court. Thereafter, BIFR sanctioned the rehabilitation scheme under SICA, also making provision for unsecured creditors (including the Appellant). Some payment was also made by the Respondent to the Appellant pursuant to an order of the Company Court.

The Division Bench of the Allahabad High Court ("HC") had allowed the Special Appeal of the Respondent and had stayed further proceedings before the Company Court till a final decision was taken on the reference made by the Respondent to the BIFR. This decision of HC was under challenge before the apex Court.

The Supreme Court considered different situations that can arise in the interplay between the Companies Act and the SICA in the matter of winding up of a company, looking at its earlier rulings.

According to the Supreme Court, this appeal from HC decision was squarely covered by the primacy given to the provisions of the SICA over the Companies Act as delineated in its earlier rulings namely, Real Value Appliances Ltd. v. Canara Bank and Rishabh Agro Industries Ltd. v. P.N.B. Capital Services Ltd. The apex Court also took note of the subsequent developments in the case and the fact that the Appellant had participated before the BIFR and had taken its dues in terms of the rehabilitation scheme.

The Supreme Court observed that whatever may be situation, whenever a reference is made to the BIFR under Sections 15 and 16 of SICA, the provisions of SICA would come into play and they would prevail over the provisions of the Companies Act. Court affirmed the view taken by the HC in concluding that the winding up proceedings before the Company Court cannot continue after a reference has been registered by the BIFR and an enquiry initiated under Section 16 of SICA.

VA View

Adding to the significant rulings in the past by the Supreme Court on this issue, this is yet another judgment pronouncing its stance on the issue concerning primacy of SICA over the Companies Act in certain cases. By this ruling, the apex court has affirmed its ruling in the case of Tata Motors Ltd. v. Pharmaceutical Products of India Ltd, (2008) 7 SCC 619, making it clear that, different situations can arise in the process of winding up a company under the Companies Act but whatever be the situation, whenever a reference is made to the BIFR under Sections 15 and 16 of the SICA, the provisions of the SICA would come into play and would prevail over the provisions of the Companies Act and proceedings under the Companies Act must give way to proceedings under the SICA.

II. Minimize interference with arbitration process as that is the forum of choice: Delhi High Court Division Bench

The Delhi High Court (Division Bench) ("the Delhi HC") in the case of Mcdonald's India Private Limited("McDonald") vs. Vikram Bakshi ("Vikram") and Ors. (collectively "the respondents), decided on July 21, 2016, has observed that Courts should minimize interference with arbitration process, which is the policy discernible from the Arbitration and Conciliation Act, 1996 ("Arbitration Act").

McDonald, Vikram and the McDonald's Corporation, U.S.A. entered into a joint venture agreement ("JVA") for setting up and operating McDonald's restaurants initially within the National Capital Region of Delhi on a nonexclusive basis. Essentially, the agreement was between McDonald and Vikram and, McDonald's Corporation, U.S.A. was a confirming party. The Delhi HC referred to relevant clauses of the JVA and the major developments that took place after the execution of JVA. The crux of the dispute was that McDonald wanted to exercise call option under the JVA as Vikram ceased to be the Managing Director of a company incorporated pursuant to provisions of JVA ("said company"). The Company petition before the Company Law Board ("CLB") came to be filed by Vikram and another alleging oppression and mismanagement against McDonald and seeking reinstatement of Vikram as the Managing Director of said company. An order was passed by CLB directing McDonald to maintain status quo over the shareholding, board pattern and right of call option. Thereafter, McDonald terminated the JVA and instituted arbitration proceedings in the London Court of International Arbitration. By an order of the Single Judge of the Delhi High Court, McDonald was restrained from pursuing the arbitration proceedings until, inter alia, the status quo order passed by CLB was vacated.

The contention of the respondents was that arbitration proceedings at London would be vexatious and oppressive. Several case laws on this and related points were discussed by the Delhi HC. The Delhi HC observed that unless and until a party seeking an anti-arbitration injunction can demonstrably show that the arbitration agreement is null and void, inoperative or incapable of being performed, no such relief can be granted in the suit or as an interim measure therein. The Delhi HC was of the view that the finding of the learned single Judge that the arbitration agreement in the present case is incapable of performance or inoperative because of the pendency of the proceedings in the CLB was not sound. According to the Delhi HC, even if it was assumed that Part I of Arbitration Act was to apply, then also, because of the provisions of Section 8 of the Arbitration Act, the judicial authority was obliged to refer the parties to arbitration, as, the Delhi HC noted that, there is now a mandate to refer the parties to arbitration unless the court finds that prima facie no valid arbitration agreement exists.

The Delhi HC finally concluded that the circumstances of invalidity of the arbitration agreement or it being inoperative or incapable of being performed did not exist in this case and observed, "Courts must be extremely circumspect and, indeed, reluctant to thwart arbitration proceedings. Thus, while courts in India may have the power to injunct arbitration proceedings, they must exercise that power rarely and only on principles analogous to those found in sections 8 and 45, as the case may be, of the 1996 Act."

Net worth doubles, no need to report to BIFR: Chennai Petroleum

Net worth doubles, no need to report to BIFR: Chennai Petroleum: Indian Oil Corporation (IOC's) subsidiary and one of the country's largest refining company Chennai Petroleum Corporation Ltd (CPCL) has come out from a situation of reporting to the Board for Industrial and Financial Reconstruction (BIFR) as its

Chandigarh law tribunal may be functional by July

Chandigarh law tribunal may be functional by July: CHANDIGARH:The corporate sector in the region comprising Punjab, Haryana, Chandigarh, Himachal Pradesh and Jammu

Delhi can neither sip nor spit

Delhi can neither sip nor spit: The Centre’s takeover of seven tea gardens has become nobody’s baby.

Scooters India, maker of Vijai Super, eager to hit the road again | Business Standard News

Scooters India, maker of Vijai Super, eager to hit the road again | Business Standard News

Scooters India jumps after New Delhi bench considers discharge from BIFR | Business Standard News

Scooters India jumps after New Delhi bench considers discharge from BIFR | Business Standard News

Andrew Yule out of BIFR | Business Line

Andrew Yule out of BIFR | Business Line

79 sick PSUs wait forJaitleys next move (Chart to follow) | Business Standard News

79 sick PSUs wait forJaitleys next move (Chart to follow) | Business Standard News

79 sick PSUs wait forJaitleys next move (Chart to follow) | Business Standard News

79 sick PSUs wait forJaitleys next move (Chart to follow) | Business Standard News

Privatising sick PSUs: who would like to buy them? | Business Standard News

Privatising sick PSUs: who would like to buy them? | Business Standard News

Privatising sick PSUs: who would like to buy them? | Business Standard News

Privatising sick PSUs: who would like to buy them? | Business Standard News

Stewarts

Stewarts

Eastern Coalfields out of BIFR ambit | Business Standard News

Eastern Coalfields out of BIFR ambit | Business Standard News

Eastern Coalfields out of BIFR ambit | Business Standard News

Eastern Coalfields out of BIFR ambit | Business Standard News

HC seeks reply of Centre on PIL seeking appointments at BIFR | Business Standard News

HC seeks reply of Centre on PIL seeking appointments at BIFR | Business Standard News

Coal India arm in east leaves illness behind

Coal India arm in east leaves illness behind

HPL rejig recipe to stay afloat

HPL rejig recipe to stay afloat

Andrew Yule set to come out of BIFR

Andrew Yule set to come out of BIFR

11 sick PSUs gets Rs 116 cr for payment of wages, other dues | Business Standard

11 sick PSUs gets Rs 116 cr for payment of wages, other dues | Business Standard

The new gold diggers

The new gold diggers

4 turnaround PSUs report profits for 3 yrs in a row | Business Standard

4 turnaround PSUs report profits for 3 yrs in a row | Business Standard

Ras Propack receives BIFR Order for rehabilitation and revival

Ras Propack receives BIFR Order for rehabilitation and revival


Ras Propack Lamipack Ltd has announced with reference to the earlier announcement by the Company and the Co-Promoters of the revival scheme, Essel Propack Ltd dated August 13, 2007, that the Company confirm the receipt of the BIFR Order dated February 17, 2009. The same was tabled at the Company's Board Meeting held on March 13, 2009.

The salient features of the said order are as under:

(a) Promoters / Co-Promoters should subscribe to equity of Rs 821.82 lacs and Co-Promoters shall bring an interest free loan of Rs 300.00 lacs for revival of the Company.

(b) The existing paid up share capital of the Company shall stand reduced by 95%.

(c) Payments to Banks / FI's towards their dues as per OTS, within 90 days of sanction of the scheme.

(d) Payments to unsecured creditors within 90 days of sanction of the scheme.

(e) Payment of statutory dues and other liabilities within the first year of revival as mentioned in the scheme and granting concessions / relief as per the applicable provisions of the Central and State Government, as applicable to Sick Companies for their early revival.

(f) Extension of the EPCG License by DGFT, to complete the remaining export obligation by the Company as per the foreign trade policy applicable to Sick Companies.

(g) Government of Maharashtra to declare the Company a "Relief Undertaking", under the provisions applicable to SICK Companies under their Industrial Policy, for the relief and concessions for Sale Tax, VAT, Electricity charges, etc.

(h) To grant waiver of outstanding ECB loan to the Company.

The stock closed the day at Rs.0.82, up by Rs.0.10 or 13.89%. The stock hit an intraday high of Rs.0.86 and low of Rs.0.59.

Ras Propack receives BIFR Order for rehabilitation and revival

Rs.653 crore revival package for Instrumentation Ltd.

Friday 13 Feb, 2009 08:31 AM JAIPUR: The Centre has approved a Rs.653 crore revival package for the ailing public sector unit, Instrumentation Limited, Kota, bringing new cheer to the industrial sector in Rajasthan, and Kota region in particular. Declared a sick unit back in 1994 and referred to BIFR, Instrumentation Limited (IL) went through many vicissitudes, including take over bids by bigger PSUs, to see this day. The package has come as shot in the arm for the newly sworn in Ashok Gehlot Government in the State. Mr. Gehlot, when in the opposition in the State, had led several delegations to the Prime Minister and Union Finance Minister in connection with the revival of the unit, once the pride of Rajasthan. The CPI (M) MP, Vasudev Acharya, also played a pivotal role in making the package a reality. The Cabinet Committee on Economic Affairs has cleared the package, prepared by IDBI for IL which is expected to come to effect once BIFR finalizes the revival plan. As such Rs.103.36 crore is to be infused as cash while another Rs.45 crores would be government guarantee against capital expenditure. The remaining Rs.504.36 crores assistance would be in the form of waiving off Government loans and interest incurred on it. Once referred to as “Russian factory”-- due to the initial USSR technical support to the unit when it was set up back in 1964—IL has a sister unit at Palakkad in Kerala, which is proportionately a smaller affair though it has been better off than the mother unit most of the time in the past. The Palakkad unit manufactures control valves and butterfly valves while the Kota IL makes electro mechanical instruments, digital control systems and precision machinery used by fertilizer industry, thermal power plants and steel industry. “It is great news for the working class. Though it took so many years—IDBI had prepared the Modified Draft Rehabilitation Scheme (MDRS) back in October 2003—the package would boost the economy of the State, and Kota in particular. The unity of the staff and the workers finally brought results,” R.K.Swamy, secretary, CITU Rajasthan Council, who played a major role in getting the package cleared, said talking to The Hindu from Kota on phone on Thursday. At the time when problems started cropping up in IL, Kota—mostly due to lack of updating the machinery and the change in market trends—in 1991-92 the unit had some 3,500 strong workforce which has now come down to less than 1,400 after many opting out for VRS.

Hindustan Antibiotics Ltd. Revival

Taking a dig at the National Democratic Alliance (NDA) government and its disinvestment initiatives, Union agriculture minister Sharad Pawar said that the present Manmohan Singh-led United Progressive Alliance (UPA) government’s decision to revive sick public sector units (PSU) under rehabilitation schemes has been a successful endeavour so far.
Pawar along with Union minister for chemicals, fertilizers and steel Ram Vilas Paswan inaugurated a new cephalosporin plant on the Hindustan Antibiotics Ltd (HAL) premises in Pimpri in the city on Saturday.
Addressing HAL employees as the chief guest, Pawar said, “The efforts by HAL employees to revive the firm from its dying stages to a profit making venture by sacrificing their monetary benefits is an example of integrity and workman spirit.”
Pawar reminded his cabinet colleague that HAL employee unions never resorted to agitations or confrontation with the government on the issue of better wages throughout the period. Hence, the ministry of chemicals, fertilizers and steel should consider the long denied benefit of the employees and should issue directions for the complete implementation of the Justice Mohan Commission’s recommendation starting from February 1.
Paswan said, “Considering the positive facets of HAL, the ministry has decided to implement the Justice Mohan Commission’s recommendation with effect from January 17 instead of February 1 as suggested by Pawar. Besides, the ministry will direct the management to disburse a gracious bonus allowance of Rs 11,000 to all employees.”
Paswan said that the Ministry would also settle arrears pending since 1997 after taking into account the two ad-hoc payments allocated to HAL. The management has been asked to form a team to examine options to release the payments.

BIFR & EGOM take steps to revive NTC mills

December 22, 2008 (India)


Following steps, as approved by the Board for Industrial and Financial Reconstruction (BIFR) and Empowered Group of Ministers (EGOM), have been taken to make the company profitable:

(i) To bring down the administrative cost of NTC, 9 subsidiary-corporations of NTC have been merged with NTC Holding Company, making it a single company with a single Board of Directors, as against 10 Companies for NTC in the past.

(ii) 67 unviable mills have been closed and compensation paid to the surplus employees of these closed mills who opted for Modified Voluntary Retirement Scheme (MVRS).

(iii) By offering MVRS to the surplus employees, the number of employees in NTC has been brought down to 12234. Under this scheme, 59,179 employees have availed voluntary retirement.

(iv) 22 mills have been identified for modernization by NTC itself. Out of these, 15 mills have so far been modernized. In addition to this, modernisation of 16 mills through Joint Venture (JV) route has also been finalized.

This information was given by the Minister of State for Textiles, Shri E.V.K.S. Elangovan in a written reply in the Lok Sabha on December 22, 2008.

DHI- Year Review

YEAR END REVIEW
Heavy Industry & Public Sector Enterprises play a pivotal role in almost all sectors of Indian economy. The Department of Heavy industry (DHI) has 34 operating Public Sector Enterprises (PSEs) under its administrative control. These PSEs are engaged in manufacturing, consultancy and contracting activities. The Department is also entrusted with the development & growth of Automotive Sector and Heavy Electrical/Heavy Engineering Sectors in the country. One PSE (Bharat Wagon Engineering Co. Ltd.) has since been transferred to M/o Railways and one more PSE (Praga Tools Ltd.) has since been merged with HMT(MT) Ltd., thus leaving the Department with 32 PSEs. Out of 32 PSEs,16 are profit making and remaining 16 are incurring loss. However, on an aggregate basis PSEs of DHI have shown a profit before tax of Rs.2783 crore in 2007-08.
Performance of the PSEs in DHI
The performance of PSEs under DHI during the last 5 years has been as under:-
(Rs. in crores)

2003-04
2004-05
2005-06
2006-07
2007-08
Production
12157
14137
19002
24067
27285
Profit before tax
-854
-455
1759
2332
2783
Restructuring of PSEs as per National Common Minimum Programme (NCMP)
In view of the policy in respect of Public Sector companies contained in the National Common Minimum Programme, the profit making PSEs are being strengthened by providing greater autonomy and the loss making PSEs are being considered for revival. Accordingly, a fresh look to identify companies under the Department which can be restructured and revived has been undertaken in consultation with Advisers/PSEs. So far, revival/restructuring packages for 26 PSEs out of 27 of DHI have been submitted to the Board for Reconstruction of Public Sector Enterprises (BRPSE). One more case (Burn Standard Company Ltd.) is yet to be referred to them. 13 PSEs where revival/restructuring has been approved by the Government are -
Hindustan Salts Limited (HSL); Bridge & Roof Company Limited (B&R); BBJ Construction Company Limited (BBJ); Praga Tools Limited (PTL); HMT (Bearings) Ltd, Bharat Pumps and Compressors Ltd. (BPCL); Braithwaite and Company Ltd. (BCL); Cement Corporation of India Ltd. (CCI); HMT (MT) Ltd.Andrew Yule & Company Ltd.. (AYCL); Bharat Heavy Plates & Vessels Ltd. (BHPV) - Taken over by BHEL; Heavy Engineering Corporation Ltd. (HEC) and Bharat Wagon & Engineering Ltd. (BWEL) – Transferred to Ministry of Railways.
In case of two PSEs, namely Bharat Ophthalmic Glass Ltd. (BOGL) and Bharat Yantra Nigam Ltd. (BYNL), closure has been approved by the Government.
Eight out of these 13 PSEs where revival plans have been sanctioned, have registered net profit (totaling to Rs.88.58 cr.) in 2007-08.
Capital Goods Sector
Capital goods sector has been consistently growing at double digit growth for the last few years. However in the current financial year (2008-09) during April-October 2008 this sector has shown decline in growth to 9.2% against 20.3% in the same period last year. This is attributed to the general slowdown in the economy.
Automotive Sector
One of the major industrial Sectors in India is the automotive Sector. Subsequent to the liberalization, the automobile sector has been aptly described as the sunrise sector of the Indian economy as this sector has witnessed tremendous growth. This sector contributes 5% to the national GDP and employs up to 11 million people.
The Indian automobile vehicle industry which has been growing at approximately 12-15% per annum (except 2007-08, which witnessed a de-growth of (-) 4% in sales) is witnessing a slump presently. The overall domestic sales of vehicles in October, 2008 and November, 2008 have declined by 14% and 18% respectively over Corresponding Period Last Year (CPLY). In November, 2008 all the segments of the automobile vehicle industry i.e the passenger vehicles, commercial vehicles, two wheelers and three wheelers have shown decline in sales of (-) 24%, (-) 50%, (-) 15% and (-)23% respectively over CPLY.
The details of domestic sales of the various segments of automobile during the period April, 2008 to November, 2008 is as under.
Sl. No. Segment Sales (April-Nov., 2008)

1 Passenger vehicles 1,004,885
2 Commercial vehicles 270,220
3 Three wheelers 241,123
4 Two wheelers 5,109,760
Total 6,625,988
NATRIP
The Government is striving to introduce superior safety, emission and performance standards in automotive sector. To achieve this objective the National Automotive Testing and R&D Infrastructure Project (NATRIP) continued its efforts for creating state-of-the-art testing and R&D infrastructure in the country. This project was approved by Govt. at a total cost of Rs.1718 cr. with seven different locations having following facilities.
Manesar
Homologation Labs / Tracks & Center of Excellence for NVH & Components
Chennai
Homologation Labs / Tracks & Center of Excellence for EMC, Passive Safety & Infotronics
Pune
Homologation Labs / Tracks & Center of Excellence for Power-train, Materials & Fatigue Testing
Indore
Test Tracks for Automotive Testing, Vehicle Dynamics Lab
VRDE
Ahmednagar
EMC Lab, ABS Test Track
Silchar
Hill Driving Training Institute, I/M Model Centre, Mechanics Training Institute
Rae Bareilly
Tractor & Off-Road Vehicle Testing Centre, Accident Data Analysis Centre
In the current year (2008-09) there is a budget provision of Rs.125 cr. out of which an amount of Rs.90 cr. has already been released.
NATRIP has made substantial and defining progress during the last one year in implementation. With the completion of the detailed engineering phase and tender documentation, NATRIP is well on its way to complete the phase –I of setting up infrastructure and capability for Testing and Validation to meet emerging requirements in line with National Automotive Safety and Emission roadmap

BIFR & EGOM take steps to revive NTC mills

Following steps, as approved by the Board for Industrial and Financial Reconstruction (BIFR) and Empowered Group of Ministers (EGOM), have been taken to make the company profitable:(i) To bring down the administrative cost of NTC, 9 subsidiary-corporations of NTC have been merged with NTC Holding Company, making it a single company with a single Board of Directors, as against 10 Companies for NTC in the past.(ii) 67 unviable mills have been closed and compensation paid to the surplus employees of these closed mills who opted for Modified Voluntary Retirement Scheme (MVRS).(iii) By offering MVRS to the surplus employees, the number of employees in NTC has been brought down to 12234. Under this scheme, 59,179 employees have availed voluntary retirement.(iv) 22 mills have been identified for modernization by NTC itself. Out of these, 15 mills have so far been modernized. In addition to this, modernisation of 16 mills through Joint Venture (JV) route has also been finalized.This information was given by the Minister of State for Textiles, Shri E.V.K.S. Elangovan in a written reply in the Lok Sabha on December 22, 2008.

CABINET APPROVES FINANCIAL RESTRUCTURING OF KONKAN RLY

Improves Net Worth of the Corporation
In a move that bodes well for Konkan Railway Corporation, the Cabinet Committee on
Economic Affairs (CCEA) has approved KRCL’s proposal on financial restructuring, thus
enabling the Corporation to continue as a PSU even after discharge of its debt liabilities. The
proposal, recommended by the Board of Directors and the Ministry of Railways, was
submitted through BRPSE (Board for Reconstruction of Public Sector Enterprises) for
approval of CCEA (Cabinet Committee on Economic Affairs).
Konkan Railway is the first and the only railway project in the country to be executed on BOT
basis. To enable timely completion of the project, while the Corporation had to resort to
commercial borrowings on a high interest rate, it was not extended any concession like
exemption from payment of dividend during construction phase. Due to this, the debt liabilities
kept mounting. Add to that the losses incurred due to non-materialization of the projected
traffic growth along the route. The Corporation, being a public utility project, was extended
loans by the Ministry of Rlys to meet its debt liabilities.
As per the financial restructuring proposal, the cost of debt provided by Ministry of Railways,
together with interest accrued thereon, will be converted into preferential shares redeemable
at the end of 15 to 20 years. The dividend payable will be non-cumulative at the dividend rate
Ministry of Railways (MoR) pays to Government of India. Any future loans provided by
Ministry of Railways to KRCL will also be converted into non-cumulative redeemable
preferential shares.
The financial assistance will be restricted to the next three years i.e. financial year 2008-09 to
2010-11. In debt servicing, the full interest amount and 50% of the redemption amount will be
made available to KRCL as and when due. These funds paid to KRCL will also be converted
into preferential shares redeemable after 15 years.
Restructuring of the finances would improve the Net Worth and Debt-Equity ratio of KRCL and
make it into a profit making organization soon. The Corporation would be able to meet its
liabilities in future provided the traffic business plan materializes. Therefore the Board of
Directors recommended reviewing the proposed arrangement before the lapse of three years,
as there may be a cause to extend this arrangement for a few more years keeping in view the
unforeseeable future. With this now, Konkan Railway will also be able to bid for big
infrastructure projects.

BRPSE working on revival package for Burn Standard

Working on the revival package for Kolkata-based Burn Standard & Company, which is under the Board for Industrial and Financial Reconstruction (BIFR), the Board for Reconstruction of Public Sector Enterprises (BRPSE) is mulling to ask the Railway ministry and the Steel Authority of India (SAIL) to take over its two wagon manufacturing units and one refractory unit, respectively. Nitish Sengupta, chairman of the BRPSE, who met Burn Standard officials here today, said that the board will now see if there was any legal snag that could stall the process of a take-over of the units. Burn Standard had two wagon manufacturing facilities, one at Howrah and another at Burnpur in Burdwan district of West Bengal. Its refractory unit was located at Salem in Tamil Nadu.
"The interest amount on the loans taken by the company is very high. It could be to the tune of Rs 150 crore," Sengupta said.
"We do not want to shut down or give grants to sick PSEs. Instead, companies should either look at tying up with a private partner or listing at the bourses wherever possible," he added.

Revival of NTC Mills

So far National Textile Corporation (NTC) has closed 67 unviable mills under Industrial Disputes (ID) Act, 1947 as per rehabilitation scheme sanctioned by the Board for Industrial and Financial Reconstruction (BIFR) and approved by Government. At present, there is no proposal to revive, reopen and modernize the above closed mills under public-private partnership. The original Revival Scheme was approved by the BIFR subsidiary-wise in April, 2002. Subsequently, a Modified Scheme (MRS-08) for NTC has been approved by BIFR on 05.09.2008. As per MRS-08, the period of implementation of revival scheme for NTC has been extended upto 31.03.2009. The total cost of MRS-08 is Rs.9102 crores which is self financing. The resources are to be generated by sale of assets of closed mills and surplus assets of viable mills. Through MRS-08, BIFR has approved closure of 12 more mills. MRS-08 has also recommended writing off of Government loan and waiver of interest thereon, as on 31.03.2007. In addition, various reliefs and concessions on Income Tax, Wealth Tax, Capital Gain Tax etc. have also been approved by BIFR. This information was given by the Minister of State for Textiles, Shri E.V.K.S. Elangovan in a written reply in the Rajya Sabha today. *******

BIFR to clear PPL package in December

The Board for Industrial and Financial Reconstruction ( BIFR) is all set to clear the revival package of Paradeep Phosphate Limited ( PPL) in the first week of December 2008. The operating agency State Bank of India ( SBI) has finalised the revival work and the notice period for clearance ends on November 30, 2008. The revival package may include proposals for restructuring the current equity from Rs 575 crore to Rs 715 crore with the fresh infusion of capital of Rs 140 crore by the promoters.
It would also have suggestions for concessions and reduction of interest on outstanding loans of around Rs 250 crore to keep afloat in future. The loans were accumulated as a government concern between 1993 and 2002.
PPL currently has a private holding of 80.45 per cent through Zuari Maroc Phosphate Limited ( ZMPL) and a union government holding of 19.55 per cent. It’s authorised capital is Rs 1000 crore.
With a face value of Rs 1000 per share, PPL’s assets till 2005-06 were around Rs 1004.84 crore and liabilities of about Rs 620.05 crore.
During this period, the company’s accumulated losses were Rs 771 crore and it has total resource fund ( trf) of Rs 1455 crore by way of secured and unsecured loans of Rs 226.35 crore and Rs 653.35 crore and a paid up of Rs 575.45 crore.
PPL has about Rs 900 crore of funds locked up with the Centre by way of fertiliser subsidy and a portion of the government’s share as owner of the company in the total amount of loss incurred since 2001-02.
The company was referred to BIFR in 2002-03 and after making a series of losses for consecutive four years it managed to turn round in 2005-06. There was, however, a periodic decrease in losses since 2001-02 to 2004-05.
The company achieved a remarkable feat when its net profit rose by a whopping 808 per cent from Rs 12.7 crore in 2005-06 to Rs 109.27 crore in 2006-07.
In 2006-07, the company achieved an annual production of 13.08 lakh tonnes and a sale of 13.18 lakh tonnes of DAP, NPK , NPK ( 10:26:26) and NPK ( 20:20:20) raising the total income to Rs 2067.2 crore from the earlier Rs 1971.3 crore.
PPL’s imports, however, are still 70 per cent of its turnover. It imports sulphure, rock, phosphate, ammonia, sulphuric acid from Morocco, Tunisia and Indonesia.

Corporate Insolvency Laws : Time to Change

With the globalisation of the Indian economy, the sphere of Corporate Insolvency Laws has widened collosally.
With the globalisation of economy, the issues relating to corporate insolvency have assumed greater significance and a need has been felt for long for bringing about reforms in this branch of law. Moreover, with the Indian economy having been opened up for investment by foreign creditors and, internationally, the Indian corporate also making investments in companies outside, the realm of cross-border insolvency law has multiplied colossally.
In the year 1999, the Government of India set up a High Level Committee headed by Justice V.B. Balakrishna Eradi,[2] a superannuated Judge of Supreme Court of India for remodeling the existing laws relating to insolvency and winding up of companies and bringing them in time with the international practices in this field.
Recommendations of the Committee
The Committee recommended that:
The jurisdiction, power and authority relating to winding up of companies should be vested in a National Company Law Tribunal which should be vested with the functions and power with regard to rehabilitation and revival of sick industrial companies, a mandate presently entrusted with BIFR under SICA.
The 1956 Act should be suitably amended to take the power away from High Court and the transfer of the pending winding up proceedings to the Tribunal.
The adoption of the international trend in law relating to corporate bankruptcy, namely, sell the assets first as quickly as possible, and relegate to a later stage the adjudication of claims and distribution of proceeds.
An in depth assessment of the office of Official Liquidators, in view of inadequate and incompetent manpower and absence of latest office equipments and technologies.
A liquidation Committee consisting of creditors of the company on the lines of Section 141 of the Insolvency Act, 1986 of UK[3] be set up to assist the Liquidator.
The repeal of SICA and recommended the ameliorative, revival and reconstructionist procedures obtaining under it to be reintegrated in a suitably amended form in the structure of the 1956 Act except that there is no stand still provision like Section 22 of SICA.
Part VII of the Companies Act, 1956 should incorporate a new substantive provision to adopt the UNCITRAL Model Law[4] as approved by the United Nations and the Model Law itself may be incorporated as a Schedule to the Companies Act, 1956, which shall apply to all cases of Cross-Border insolvency.
Adopt the necessary principles enunciated under the heading "Legal Framework", "Orderly and Effective Insolvency Procedures Key issues", [5] to bring the provisions of the Companies Act, 1956 in line with international practices.
The Committee completed its work and submitted its report to the Central Government in the year 2000.In August 2001, the Companies (Amendment) Bill, 2001 and the Sick Industrial Companies (Special Provisions) Repeal Bill, 2001 were introduced in the Parliament of India.
The Bills, if passed in their present form will bring the curtains down on the Sick Industrial Companies (Special Provisions) Act, 1985 and will restructure the Companies Act, 1956 in a big way leading to the new regime of tackling corporate rescue and insolvency procedures in India with a view to creating confidence in the minds of investors, creditors, labour and shareholders.
Scheme of Insolvency Laws
The stream of insolvency laws can be segregated chiefly under two heads: Personal Insolvency, which deals with individuals and partnership firms governed by Provisional Insolvency Act, 1920 and Presidency Towns Insolvency Act, 1908 and Corporate Insolvency, whose consequence is winding up of the company under the Companies Act, 1956.
In the process of liberalization, deregulation and adopting market economy, India is experiencing a massive growth of retail loans to individuals, housing loans and credit card users. On account of phenomenal rise in retail lending it will be necessary in the near future to give a re-look at the personal insolvency laws to ensure that any insolvency proceedings against individuals are also expeditiously decided.
However, the basic tenets of corporate insolvency can be classified as: restoring the debtor company to profitable trading where it is practicable; to maximize the return to creditors as a whole where the company itself cannot be saved; to establish a fair and equitable system for the ranking of claims and the distribution of assets among creditors, involving a redistribution of rights; and to provide a mechanism by which the causes of failure can be identified and those guilty of mismanagement brought to book; placement of the assets of the company under external control; substitution of collective action for individual pursuits; avoidance of certain transactions and fraudulent conveyances, dissolution and winding up etc.
In context of corporate laws, the word insolvency has neither been used nor defined. However, Section 433 (e) covers a company, which is unable to pay its debts, and thus constitutes a ground for winding up of the company. Inability to pay its debts would be a case where, a company's entire capital is lost in heavy losses and no accounts are prepared and filed and no business is done for one year. In such circumstances, the Registrar of Companies makes out a case of inability to pay debts. These debts however, would only include debts, incurred after the legal incorporation of the Company. Inability to pay debts has even been amplified in Section 434 wherein, a creditor with a due of Rs. 500 [6] or more serves a demand by registered post and the company neglects to pay, secure or compound the same in 3 weeks, in cases where the execution of a decree returned unsatisfied and also where the Court is otherwise satisfied that the company is unable to pay its debts.
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.[7] Net worth has been defined as the sum total of the paid up capital and free reserves.[8]
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 finalisation 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 finalisation 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.[9]
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.[10]
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,[11] 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.
Institutional Machinery
High Court is the Court of proper jurisdiction for handling winding up proceedings and power sought to be transferred to the NCLT with the onset of reforms by way of a proposed Bill. The official liquidator is the liquidator in compulsory winding up. Where a winding up order has been made or where a Provisional Liquidator has been appointed, the Liquidator shall take into his custody or under his control all the property, effects and actionable claims to which the company is or appears to be entitled. All the property and effects of the company shall be deemed to be in the custody of the Court as from the date of the order for the winding up of the company.[12] The Creditors Committee on inspection may be appointed .In relation to corporate insolvency, the official liquidator as an officer of the Court or the Court receiver as an officer of the Court are dealing with insolvency related procedures.
Pursuit of Individual Claims
In the sphere of insolvency laws in India, where all the suits are stayed on making of the winding up order, parties may pursue individual claims in certain circumstances.
Winding up procedure implies all personal rights be converted into right to prove debt in winding up.
Under section 446, stay on all suits and the winding up Court to decide all suits by or against the company.
A secured creditor may enforce security interest without a suit and therefore, real rights of secured creditors are protected.
Criminal proceedings or proceedings against directors or officers are not stayed.
Income tax proceedings will continue against the liquidator.
The Stacking Order of Priorities
The debts due as workmens dues and the claims of the secured creditors sacrificed to workmen have an overriding preferential claim or priority to all debts.[13] The debts payable shall be paid in full unless the assets are insufficient to meet them in which case they shall abate in equal proportions.
In the dying stages of winding up proceedings, there is stacking of priorities running from the secured creditors from out of their assets securing their claims, subject to the pari passu claims of the workmen, further, the costs and expenses of winding up under Section 530 (6), then, the preferential creditors under Section 530 (1), the floating charge holders and the unsecured creditors.
There are other statutory preferential payments for taxes, revenues and cesses, wages or salary for past due prior to winding up or for period not exceeding 4 months when there is a continuing employment for the beneficial winding up and for provident fund, pension and other claims.[14]
Rules of insolvency for valuation of annuities and contingent liabilities as are prescribed by the Provincial Insolvency Act and the Presidency Town Insolvency Act continue to apply.
Also, any transfer of property, delivery of goods, payment, execution or other act relating to the property made, taken or done by or against the company within 6 months prior to commencement of winding up be deemed a fraudulent preference.[15]
Compromises & Arrangements
Apart from the lengthy and time consuming winding up procedure, all the companies liable to be wound up under the Companies Act may resort to the alternative of compromise or arrangement. The Court may make orders to enforce these remedies[16] and where a meeting of creditors or class of creditors or members or any class of members is called upon, certain disclosures shall be made. The orders passed by the Courts include transfer of property to another company and to facilitate amalgamation, merger and demergers. Even reduction of capital to the extent that the capital is lost, or capital is in surplus is permitted.
An Analysis
The institution of BIFR has hardly satisfied the call for revival and rehabilitation of sick industrial undertakings and SICA has proved to be a complete failure. The lenders i.e. the banks and financial institutions, find SICA to be the biggest obstacle on their road map to recovery of dues. The existing legal framework of corporate insolvency faces several follies, which may be rectified once the proposed amendments are notified in the Official Gazette.
Procedural delays
There are inherent defects 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. The decisions by the banks are also neither transparent, nor subject to judicial review. 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.
Lack of timely commencement of proceedings
Under the existing law, a company can approach the BIFR for adopting steps for its revival, on erosion of its entire net worth. The erosion of entire net worth is too late a stage to attempt restructuring as by the time the net worth is eroded the company is too sick to be revived and has lost its resilience to restructure and revive itself.
Poor enforcement mechanism
The mechanism for its implementation is so poor that violations take place fearlessly leaving no fear for law. The misuse of the said forum in making an entry by manipulating must be curbed by strict penal consequences for such misuse, which should be demonstrably used to ensure that no entity attempts to misuse these provisions. However, this aspect and solution to this problem has to be found out in the proposed legislation.
Misuse of protection against recovery proceedings
Under SICA, an automatic stay operates against all kind of recovery and distress proceedings against all creditors once the reference filed by the company is registered. This is the principal drawback of the existing legislation as this has led to BIFR becoming a haven for defaulting companies. Erring debtors have misused SICA to seek protection and moratorium from recovery proceedings. The companies are able to enter easily 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.
Lack of extra territorial jurisdiction
Indian insolvency laws do not have any extra-territorial jurisdiction, nor do they recognize the jurisdiction of foreign courts in respect of branches of foreign banks operating in India. Therefore, if a foreign company is taken into liquidation outside India, its Indian business will be treated as a separate matter and will not be automatically affected unless an application is filed before an insolvency Court for winding up of its branches in India.
The recommendations of the Eradi Committee have been translated into the Companies (Amendment) Bill, 2001 and the Sick Industrial Companies (Special Provisions) Repeal Bill, 2001 to mend these defects in the existing laws and the end result being tribunalization of justice. The Companies (Amendment) Bill, 2001 proposes amendment of Article 323B of the Constitution of India and provisions of Part VII of the Companies Act, 1956 for setting up of a National Company Law Tribunal (NCLT) and its Appellate Tribunal. The Bill proposes repeal of SICA and abolition of Company Law Board.
Though tribunalisation of justice is now a recognised trend, the Indias experiences with Tribunals have nothing to boast about. They have largely failed to serve the purpose with which they are set up. NCLT would be burdened with workload of enormous magnitude and in the process would be likely to lose focus on revival and rehabilitation of sick entities. Lastly, the misuse of the said forum in making an entry by manipulating/feigning sickness must be curbed by strict penal consequences for such misuse, which should be demonstrably used to ensure that no entity attempts to misuse these provisions. However, this aspect and solution to this problem has to be found out in the proposed legislation.
At present the Government is considering the adoption of UNCITRAL Model Law on Cross-Border Insolvency to meet the demands of globalisation of economy and to deal with international insolvency. This will radically change the orientation of Indian law and make it suitable for dealing with the challenges arising from globalisation and increasing integration of Indian economy with the world economy.
The increasing incidence of cross-border insolvencies reflects the continuing global expansion of trade and investment. However, national insolvency laws have by and large not kept pace with the trend, and they are often ill equipped to deal with cases of a cross-border nature. This frequently results in inadequate and inharmonious legal approaches, which hamper the rescue of financially troubled businesses, are not conducive to fair and efficient administration of cross-border insolvencies, impede the protection of the assets of the insolvent debtor against dissipation, and hinder maximisation of the value of those assets.[17]
While drafting the substantive and procedural rules of bankruptcy, international standards for both national and cross-border insolvency should be taken into consideration which, based on Indian situation, should be suitably incorporated.
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.

HEC set to resume social projects

Ranchi, Nov. 13: With preparations afoot to commemorate its golden jubilee year on November 15, the Heavy Engineering Corporation Ranchi (HEC) today promised that it would resume funding schools and colleges, revamp its existing hospital into a multi-speciality centre and work towards setting up of a medical college.
“HEC has been forced to put on hold many of its social projects owing to its dismal financial liquidity. That does not mean that we have shelved our responsibilities altogether. The account books are already on the right tracks . As soon as the financial reserves of the corporation improves, it stands committed to usher in a golden era for Ranchi and the state,” HEC director(personnel) M.R. Venugopal told The Telegraph.
Venugopal said that HEC had been funding many of the schools established on its sprawling campus in the Dhurwa besides carrying out a number of welfare programmes in the surrounding villages. The corporation was also funding generously the plant hospital which was regarded as one of the best in Ranchi not very long ago.
However, Venugopal appealed to all employees and trade unions to cooperate with the corporation, sink all differences and refrain from resorting to agitation and join hands to ensure a rapid turnaround of the company.
Set up in 1958 as the mother of all industries, to aid setting up of one steel plant in the country under every five year plan, the corporation was referred to Board for Industrial and Financial Reconstruction (BIFR) twice for perpetually running into losses. Finally in 2005, BIFR ordered a permanent closure of HEC and initiation of liquidation proceedings.
Things have finally begun to look up for HEC with the corporation recording net profits since 2006 onwards in addition to securing record work orders from Steel Authority of India, Coal India, Neelachal Ispat, ISRO and the railways and defence sector.
In September this year, acknowledging HEC's persistent efforts at a complete turnaround, the Centre accorded its assent for a complete financial restructuring that included writing off the central loans and raising HEC’s cash credit limits by Rs 100 crore, Venugopal said.

NTC to shut down three textile mills

The National Textile Corporation (NTC) has decided to close its two textile units in Punjab and one in Rajasthan. This decision comes in the wake of the approval of Industrial Board of Financial Reconstruction (BIFR) which has concluded twelve NTC mills to be unviable for operations and approved closure of the same.The mills are Kharar Textile Mills, Kharar and Suraj textile mills, Malout, both in Punjab and Shri Bijay Cotton Mills in Bijaynagar, Rajasthan. The Chairman cum Managing Director of NTC has written to the Labour Ministry informing about the closure with an assurance that the sacked employees would be given very attractive retirement terms. This is the second mill of NTC to be closed in Kharar after the closure of the Panipat Woolen Mills in 2003. These closures come contrary to statements made by the Prime Minster assuring the country of safeguarding interests of employees in public and private sector companies due to recessionary trends, a fall out of the global financial crisis

The National Textile Corporation (NTC) has decided to close its two textile units in Punjab and one in Rajasthan. This decision comes in the wake of the approval of Industrial Board of Financial Reconstruction (BIFR) which has concluded twelve NTC mills to be unviable for operations and approved closure of the same.The mills are Kharar Textile Mills, Kharar and Suraj textile mills, Malout, both in Punjab and Shri Bijay Cotton Mills in Bijaynagar, Rajasthan. The Chairman cum Managing Director of NTC has written to the Labour Ministry informing about the closure with an assurance that the sacked employees would be given very attractive retirement terms. This is the second mill of NTC to be closed in Kharar after the closure of the Panipat Woolen Mills in 2003. These closures come contrary to statements made by the Prime Minster assuring the country of safeguarding interests of employees in public and private sector companies due to recessionary trends, a fall out of the global financial crisis

Liquidity crunch likely to delay lifeboat for central PSUs

NEW DELHI: The revival process of 83 central public sector enterprises (CPSEs) is likely to be delayed due to the liquidity crunch. Public sector banks have said that they would not be in position to participate in bailing them out by waiving interests and infusing fresh capital. The government has approved Rs 9192.69 crore bailout package to revive 32 CPSEs. The package has cash assistance of Rs 2,013 crore and non-cash assistance of Rs 7,179.69 crore. The package has been extended to the sick firms on recommendation of the Board for Reconstruction of Public Sector Enterprise (BRPSE). The latest setback has come for Mining & Allied Machinery Corp (MAMC), which owes Rs 520.68 crore to State Bank of India (SBI). The bank has rejected its application for interest waiver. “Traditionally, PSU banks have been lenient with sick PSUs and have been offering loans at considerably lower interest rates. They also waived off interests in case companies went sick. However, due to the financial crisis, banks are facing liquidity crunch,” an official in the ministry of heavy industries said. Currently, there are 29 PSUs under the ministry that have been declared sick. The refusal to bail out ailing PSUs forced the government to divest up to 74% stake in HMT Bearings. “It’s not that the banks are asking for higher interest rates from PSUs. Already, we take into account that the company is sick and under financial strain. However, given the current situation, it is not possible to offer freebies like full waiver of interest charges or repayment of principal amount only after the company has turned profit making,” an SBI official said. The government had recommended that the revival of sick PSUs should be taken by the concerned administrative ministry and it should prepare a financial and business restructuring plan. The revival scheme includes waiver of loan and interest, conversion of loan into equity, fresh cash infusion and change of management. Some companies such as Easter Coalfields, Praga Tools and Hindustan Antibiotics for which the revival scheme was approved have started making profit since the last financial year. The PSUs are planning to request banks to spread their loan period over a longer term and allow part-payment of the interest if the full outstanding amount cannot be waived off.

BRPSE seeks bigger role for DPE

In view of the delay in taking the proposals for revival of PSUs to the Cabinet for approval, the Board for Reconstruction of Public Sector Enterprises has requested the government to enhance the role and responsibilities of the department of public enterprises (DPE).
The DPE works as the secretariat to the board while the responsibility to obtain Cabinet approval for revival package of a PSU lies with its administrative ministry.
The board on Wednesday unanimously decided to request the government to hand over the task to DPE, sources said.

HMT Bearings likely to be referred to BRPSE soon

The department of heavy industries is set to take HMT Bearings to the Board for Reconstruction of Public Sector Enterprises (BRPSE) shortly. HMT Bearings had posted the lowest accumulated losses among HMT group of companies in 2003-04.
The department’s move is in line with the government’s policy as outlined in the mandate for BRPSE - that revival of only viable PSEs need to be attempted, and capital infusion to units that are unlikely to regain health, should be avoided.
HMT group of public sector undertakings (PSUs) had reported total accumulated losses of about Rs 1290 crore last year. HMT, which was divided into five separate units in 2000 has only one profit-making concern - HMT International, which recorded a turnover of about Rs 20 crore in 2003-04.
HMT Bearings recorded the least accumulated losses of Rs 16 crore, out of all the concerns. The maximum accumulated losses have been recorded by HMT Watches at Rs 415 crore and its 2,200 employees have not received any salary since August 2004. The government had injected some funds in 2002, but the PSU is still in the red.
The company suffers from severe domestic competition which it is unable to meet. “Its machinery is around 35 years old,” sources say. Thus, reviving the company is not going to be easy and it also now depends on how much funds the government has to adhere to its commitment to revive PSUs rather than winding them up.
HMT Ltd, which is engaged in the production of machine tools, watches, tractors, printing machinery etc, has accumulated losses of Rs 400 crore. Its 2,500 employees have, however, been receiving their salaries.
The Hindustan Machine Tools, which has about 4,500 employees has accumulated losses of about Rs 380 crore. The company has received Rs 40 crore budgetary support and all statutory dues of the company have been cleared this month.
“However, it is HMT Chinar Watches which needs utmost attention,” sources point out. It has accumulated losses worth Rs 80 crore and has had no production for the past one year. “Though its 650 employees received salaries till August 2004, no production has taken place,” sources said.

Corporate Insolvency Laws

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income tax india For Your Reading PleasureCorporate Insolvency Laws in IndiaWith the globalisation of the Indian economy, the sphere of Corporate Insolvency Laws has widened collosally.
With the globalisation of the Indian economy, the sphere of Corporate Insolvency Laws has widened collosally.
With the globalisation of economy, the issues relating to corporate insolvency have assumed greater significance and a need has been felt for long for bringing about reforms in this branch of law. Moreover, with the Indian economy having been opened up for investment by foreign creditors and, internationally, the Indian corporate also making investments in companies outside, the realm of cross-border insolvency law has multiplied colossally.
In the year 1999, the Government of India set up a High Level Committee headed by Justice V.B. Balakrishna Eradi,[2] a superannuated Judge of Supreme Court of India for remodeling the existing laws relating to insolvency and winding up of companies and bringing them in time with the international practices in this field.
Recommendations of the Committee
The Committee recommended that:
The jurisdiction, power and authority relating to winding up of companies should be vested in a National Company Law Tribunal which should be vested with the functions and power with regard to rehabilitation and revival of sick industrial companies, a mandate presently entrusted with BIFR under SICA.
The 1956 Act should be suitably amended to take the power away from High Court and the transfer of the pending winding up proceedings to the Tribunal.
The adoption of the international trend in law relating to corporate bankruptcy, namely, sell the assets first as quickly as possible, and relegate to a later stage the adjudication of claims and distribution of proceeds.
An in depth assessment of the office of Official Liquidators, in view of inadequate and incompetent manpower and absence of latest office equipments and technologies.
A liquidation Committee consisting of creditors of the company on the lines of Section 141 of the Insolvency Act, 1986 of UK[3] be set up to assist the Liquidator.
The repeal of SICA and recommended the ameliorative, revival and reconstructionist procedures obtaining under it to be reintegrated in a suitably amended form in the structure of the 1956 Act except that there is no stand still provision like Section 22 of SICA.
Part VII of the Companies Act, 1956 should incorporate a new substantive provision to adopt the UNCITRAL Model Law[4] as approved by the United Nations and the Model Law itself may be incorporated as a Schedule to the Companies Act, 1956, which shall apply to all cases of Cross-Border insolvency.
Adopt the necessary principles enunciated under the heading "Legal Framework", "Orderly and Effective Insolvency Procedures Key issues", [5] to bring the provisions of the Companies Act, 1956 in line with international practices.
The Committee completed its work and submitted its report to the Central Government in the year 2000.In August 2001, the Companies (Amendment) Bill, 2001 and the Sick Industrial Companies (Special Provisions) Repeal Bill, 2001 were introduced in the Parliament of India.
The Bills, if passed in their present form will bring the curtains down on the Sick Industrial Companies (Special Provisions) Act, 1985 and will restructure the Companies Act, 1956 in a big way leading to the new regime of tackling corporate rescue and insolvency procedures in India with a view to creating confidence in the minds of investors, creditors, labour and shareholders.
Scheme of Insolvency Laws
The stream of insolvency laws can be segregated chiefly under two heads: Personal Insolvency, which deals with individuals and partnership firms governed by Provisional Insolvency Act, 1920 and Presidency Towns Insolvency Act, 1908 and Corporate Insolvency, whose consequence is winding up of the company under the Companies Act, 1956.
In the process of liberalization, deregulation and adopting market economy, India is experiencing a massive growth of retail loans to individuals, housing loans and credit card users. On account of phenomenal rise in retail lending it will be necessary in the near future to give a re-look at the personal insolvency laws to ensure that any insolvency proceedings against individuals are also expeditiously decided.
However, the basic tenets of corporate insolvency can be classified as: restoring the debtor company to profitable trading where it is practicable; to maximize the return to creditors as a whole where the company itself cannot be saved; to establish a fair and equitable system for the ranking of claims and the distribution of assets among creditors, involving a redistribution of rights; and to provide a mechanism by which the causes of failure can be identified and those guilty of mismanagement brought to book; placement of the assets of the company under external control; substitution of collective action for individual pursuits; avoidance of certain transactions and fraudulent conveyances, dissolution and winding up etc.
In context of corporate laws, the word insolvency has neither been used nor defined. However, Section 433 (e) covers a company, which is unable to pay its debts, and thus constitutes a ground for winding up of the company. Inability to pay its debts would be a case where, a company's entire capital is lost in heavy losses and no accounts are prepared and filed and no business is done for one year. In such circumstances, the Registrar of Companies makes out a case of inability to pay debts. These debts however, would only include debts, incurred after the legal incorporation of the Company. Inability to pay debts has even been amplified in Section 434 wherein, a creditor with a due of Rs. 500 [6] or more serves a demand by registered post and the company neglects to pay, secure or compound the same in 3 weeks, in cases where the execution of a decree returned unsatisfied and also where the Court is otherwise satisfied that the company is unable to pay its debts.
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.[7] Net worth has been defined as the sum total of the paid up capital and free reserves.[8]
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 finalisation 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 finalisation 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.[9]
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.[10]
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,[11] 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.
Institutional Machinery
High Court is the Court of proper jurisdiction for handling winding up proceedings and power sought to be transferred to the NCLT with the onset of reforms by way of a proposed Bill. The official liquidator is the liquidator in compulsory winding up. Where a winding up order has been made or where a Provisional Liquidator has been appointed, the Liquidator shall take into his custody or under his control all the property, effects and actionable claims to which the company is or appears to be entitled. All the property and effects of the company shall be deemed to be in the custody of the Court as from the date of the order for the winding up of the company.[12] The Creditors Committee on inspection may be appointed .In relation to corporate insolvency, the official liquidator as an officer of the Court or the Court receiver as an officer of the Court are dealing with insolvency related procedures.
Pursuit of Individual Claims
In the sphere of insolvency laws in India, where all the suits are stayed on making of the winding up order, parties may pursue individual claims in certain circumstances.
Winding up procedure implies all personal rights be converted into right to prove debt in winding up.
Under section 446, stay on all suits and the winding up Court to decide all suits by or against the company.
A secured creditor may enforce security interest without a suit and therefore, real rights of secured creditors are protected.
Criminal proceedings or proceedings against directors or officers are not stayed.
Income tax proceedings will continue against the liquidator.
The Stacking Order of Priorities
The debts due as workmens dues and the claims of the secured creditors sacrificed to workmen have an overriding preferential claim or priority to all debts.[13] The debts payable shall be paid in full unless the assets are insufficient to meet them in which case they shall abate in equal proportions.
In the dying stages of winding up proceedings, there is stacking of priorities running from the secured creditors from out of their assets securing their claims, subject to the pari passu claims of the workmen, further, the costs and expenses of winding up under Section 530 (6), then, the preferential creditors under Section 530 (1), the floating charge holders and the unsecured creditors.
There are other statutory preferential payments for taxes, revenues and cesses, wages or salary for past due prior to winding up or for period not exceeding 4 months when there is a continuing employment for the beneficial winding up and for provident fund, pension and other claims.[14]
Rules of insolvency for valuation of annuities and contingent liabilities as are prescribed by the Provincial Insolvency Act and the Presidency Town Insolvency Act continue to apply.
Also, any transfer of property, delivery of goods, payment, execution or other act relating to the property made, taken or done by or against the company within 6 months prior to commencement of winding up be deemed a fraudulent preference.[15]
Compromises & Arrangements
Apart from the lengthy and time consuming winding up procedure, all the companies liable to be wound up under the Companies Act may resort to the alternative of compromise or arrangement. The Court may make orders to enforce these remedies[16] and where a meeting of creditors or class of creditors or members or any class of members is called upon, certain disclosures shall be made. The orders passed by the Courts include transfer of property to another company and to facilitate amalgamation, merger and demergers. Even reduction of capital to the extent that the capital is lost, or capital is in surplus is permitted.
An Analysis
The institution of BIFR has hardly satisfied the call for revival and rehabilitation of sick industrial undertakings and SICA has proved to be a complete failure. The lenders i.e. the banks and financial institutions, find SICA to be the biggest obstacle on their road map to recovery of dues. The existing legal framework of corporate insolvency faces several follies, which may be rectified once the proposed amendments are notified in the Official Gazette.
Procedural delays
There are inherent defects 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. The decisions by the banks are also neither transparent, nor subject to judicial review. 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.
Lack of timely commencement of proceedings
Under the existing law, a company can approach the BIFR for adopting steps for its revival, on erosion of its entire net worth. The erosion of entire net worth is too late a stage to attempt restructuring as by the time the net worth is eroded the company is too sick to be revived and has lost its resilience to restructure and revive itself.
Poor enforcement mechanism
The mechanism for its implementation is so poor that violations take place fearlessly leaving no fear for law. The misuse of the said forum in making an entry by manipulating must be curbed by strict penal consequences for such misuse, which should be demonstrably used to ensure that no entity attempts to misuse these provisions. However, this aspect and solution to this problem has to be found out in the proposed legislation.
Misuse of protection against recovery proceedings
Under SICA, an automatic stay operates against all kind of recovery and distress proceedings against all creditors once the reference filed by the company is registered. This is the principal drawback of the existing legislation as this has led to BIFR becoming a haven for defaulting companies. Erring debtors have misused SICA to seek protection and moratorium from recovery proceedings. The companies are able to enter easily 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.
Lack of extra territorial jurisdiction
Indian insolvency laws do not have any extra-territorial jurisdiction, nor do they recognize the jurisdiction of foreign courts in respect of branches of foreign banks operating in India. Therefore, if a foreign company is taken into liquidation outside India, its Indian business will be treated as a separate matter and will not be automatically affected unless an application is filed before an insolvency Court for winding up of its branches in India.
The recommendations of the Eradi Committee have been translated into the Companies (Amendment) Bill, 2001 and the Sick Industrial Companies (Special Provisions) Repeal Bill, 2001 to mend these defects in the existing laws and the end result being tribunalization of justice. The Companies (Amendment) Bill, 2001 proposes amendment of Article 323B of the Constitution of India and provisions of Part VII of the Companies Act, 1956 for setting up of a National Company Law Tribunal (NCLT) and its Appellate Tribunal. The Bill proposes repeal of SICA and abolition of Company Law Board.
Though tribunalisation of justice is now a recognised trend, the Indias experiences with Tribunals have nothing to boast about. They have largely failed to serve the purpose with which they are set up. NCLT would be burdened with workload of enormous magnitude and in the process would be likely to lose focus on revival and rehabilitation of sick entities. Lastly, the misuse of the said forum in making an entry by manipulating/feigning sickness must be curbed by strict penal consequences for such misuse, which should be demonstrably used to ensure that no entity attempts to misuse these provisions. However, this aspect and solution to this problem has to be found out in the proposed legislation.
At present the Government is considering the adoption of UNCITRAL Model Law on Cross-Border Insolvency to meet the demands of globalisation of economy and to deal with international insolvency. This will radically change the orientation of Indian law and make it suitable for dealing with the challenges arising from globalisation and increasing integration of Indian economy with the world economy.
The increasing incidence of cross-border insolvencies reflects the continuing global expansion of trade and investment. However, national insolvency laws have by and large not kept pace with the trend, and they are often ill equipped to deal with cases of a cross-border nature. This frequently results in inadequate and inharmonious legal approaches, which hamper the rescue of financially troubled businesses, are not conducive to fair and efficient administration of cross-border insolvencies, impede the protection of the assets of the insolvent debtor against dissipation, and hinder maximisation of the value of those assets.[17]
While drafting the substantive and procedural rules of bankruptcy, international standards for both national and cross-border insolvency should be taken into consideration which, based on Indian situation, should be suitably incorporated.
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.