Mediator Status For Bifr In Recast Sick Companies Act

The government yesterday tabled a bill in Parliament ordering a complete recast of the Sick Industrial Companies Act, 1985, aimed at expediting the revival of sick companies and thereby arresting the problem of growing industrial sickness.

The new legislation envisages a change in the jurisdiction of the Board for Industrial & Financial Reconstruction (BIFR) by taking away the judicial powers of the board. Under the changed SICA, the BIFR will act as a mediator between the sick company, the creditors and the various concerned parties to help arrive at a consensus regarding the revival strategies.

The bill empowers the BIFR to attempt outright sale of a sick unit if all revival attempts fail and decide the distribution of sale proceeds among the various parties. Winding-up cases will henceforth be referred to high courts only if all attempts by the board to find a buyer for the sick company fail.

 

The new bill also proposes to abolish the Appellate Authority for Industrial and Financial Reconstruction (AAIFR). Compa-nies seeking to appeal against the BIFRs decision will now have to approach the high courts. Other changes proposed in the bill include redefining sickness by linking it to debt default and creating an early warning system on industrial sickness in a company.

The Sick Industrial Companies (Special Provisions) Bill, 1997, which was introduced on the last day of the budget session, will now be automatically referred to the Parliamentary standing committee on finance for comments. The basic idea of introducing the bill so far ahead of the monsoon session is to allow the standing committee to incorporate its comments, said a senior ministry official.

Under the revamped Act, the two broad categories of reference to the board will be voluntary and mandatory reference. Under the mandatory reference, a company will be registered with the BIFR within 60 days from the date of finalisation of the audited accounts if more than half its net worth has been eroded during the immediately preceding four financial years. The new bill has also proposed a time-bound frame for the rehabilitation strategies of sick companies in order to speed up the entire revival process. However, the time limit for each stage of revival of a sick company will be decided by the BIFR.

In the first stage, the promoters would play the key role. Within 15 days from the date of reference, the board would direct the promoters of sick companies to submit their revival package in consultation with the financial institutions. If the proposed package receives the approval of all concerned parties, it would have to be endorsed by the BIFR to be made effective.

If a solution is not forthcoming, the BIFR will step in to formulate a revival strategy in consultation with the secured creditors. If the package is supported by all concerned parties, then the BIFR will accept it.

If this too fails, then the revival process will enter the third and final stage. Here, the BIFR shall direct the secured creditors to formulate a revival strategy. At least 75 per cent of the secured creditors should endorse a package for it to be accepted by the BIFR. The new Act withdraws the veto powers of any single secured creditor.

If no viable package emerges after these three stages, the company would have to be sold as a going concern. The new bill reiterates that when a sick industrial company is sold under a scheme sanctioned by the BIFR, the board may distribute the sale proceeds to the entitled parties instead of going through the high courts for the distribution of sale proceeds. All these steps will have to be completed within a specified time limit set by the BIFR.

In case the BIFR fails to find any buyers for the sick company, it may direct the company to be wound up and accordingly forward its opinion to the concerned high court.

SICA RECAST: KICKING OFF REFORMS PHASE-II

Sickness redefined; debt default new criterion

Reference of sick firm to high court for wind-up only after outright sale has failed

Reference to BIFR made optional

Early warning system insti- tuted; reference to BIFR mandatory if more than 50% of networth has been eroded

BIFR to be recast as a mediator instead of a court; to play a more proactive role

BIFR to prescribe time limits for three-stage revival plan

Automatic stay on legal proceedings against sick company disallowed; to be permitted only if declared by BIFR

BIFR monitoring made mandatory