The Insolvency & Bankruptcy Code v/s SICA: A Comparative Analysis.
[Charu Singh]
The author is a fifth year student of Ram Manohar Lohiya National Law University, Lucknow.
Introduction
The Sick Industrial Companies (Special Provisions) Act, 1985 [“SICA”] was passed by the Parliament with the objective of “securing the timely detection of sick and potentially sick companies and speedy determination by a Board of experts.”[1] Thereafter, the Act was repealed by way of the Sick Industrial Companies (Special Provisions) Repeal Act, 2003, which came into effect on December 1, 2016 and resulted in the dissolution of the Board for Industrial & Financial Reconstruction[2] [“BIFR”]. BIFR’s main responsibility was determination of sickness of industrial companies and to prescription of measures for revival of such companies. However, on December 1, 2016, the President gave his assent to the Insolvency and Bankruptcy Code, 2016 [the “Code”] with the view of “maximization of value of assets and to promote entrepreneurship, availability of credit and balance the interest of all stakeholders[3].” The Code essentially replaces the mechanism for revival of sick companies, amongst other persons, as was provided under SICA.
Now, we shall look into the essential differences between the procedural and substantive law contemplated under SICA and the Code.
Process of Rehabilitation
(1) Sick Industrial Companies (Special Provisions) Act
SICA provided for a multi-stage process for revival of sick companies. The first step involved reference of the sick company to the BIFR by the Board of Directors of the Company itself or the Central Government, Reserve Bank of India, State Government, Public Financial Institution, State level institution or a Scheduled Bank. BFIR, consequently, made an enquiry into the sick company within sixty days of such reference. BIFR then had two options, one, passing an order giving time to company to escape insolvency; second, passing an order for preparation of scheme for revival. If BIFR passed an order for preparation of draft scheme for revival, the draft was prepared generally in a span of ninety days choosing from an array of options available under SICA – financial reconstruction, amalgamation, sale or lease of the undertaking, etc. This draft scheme was then published by BIFR in the daily newspapers inviting suggestions for changes or modifications. Upon considering the suggestions, the scheme was then finalized by BIFR.
(2) The Insolvency & Bankruptcy Code
The Code provides for an integrated “corporate insolvency resolution process.” Upon default, any financial creditor, an operational creditor or the corporate debtor itself may initiate an insolvency resolution process by making an application to the National Company Law Tribunal [“NCLT”]. Upon satisfaction of the existence of a default and non-payment of dues by the defaulter, the NCLT may admit the application. The corporate insolvency resolution process is to be completed within one hundred and eighty days, which can be further extended to two hundred and seventy days only. The NCLT, thereafter, shall declare a moratorium, call for claims and appoint an insolvency professional who shall take over the company. A credit committee of all creditors shall be constituted, wherein each creditor votes. If 75% of the creditors approve the ‘resolution plan’, the plan will be implemented for the functioning of the Company. In case the creditors do not approve a plan, the Company goes into liquidation. There is a waterfall mechanism in place based on order of priority for distribution of assets on liquidation.
Key Differences
Time
The Code provides for a time-bound resolution process. References of sick companies under SICA take around one or two years to get admitted for further investigation. While the Code is still new, there is a barrage of cases from BIFR, Debt Recovery Tribunal and the Companies Act, 1956 that will now fall under the ambit of NCLT. This may lead to delay in completion of the insolvency process within the prescribed limit of one hundred and eighty days. On this point, the National Company Law Appellate Tribunal [“NCLAT”], recently, ruled that the time limits prescribed under sections 7, 9 and 10 of the Code are merely directory and not mandatory, but however, the one hundred-eighty day timeline, extendable to two hundred and seventy days, is mandatory[4]. The ruling, thus, provides a gist of the Tribunal’s view of the objectives of the Code.
Trigger Point
SICA is only triggered when there is a loss of fifty per cent of a company’s worth. Therefore, it’s already too late, because half of the company’s worth is already eroded by the time BIFR decides to revive or liquidate it. However, the trigger, ironically, for liquidating a sick company is only a default of five hundred rupees. Conversely, the trigger point under the Code is one lakh rupees which can be increased up to one crore rupees, by way of notification of the government.
Practice
The BIFR and High Courts are reluctant in liquidating a sick company due to fear of loss of jobs, labour unrest, etc[5]. SICA was also misused by the debtor company to protect itself from creditors’ claims. This is not a possibility anymore, since the resolution plan so voted by the credit committee, ensures the creditors’ control over the functioning of the company. The corporate debtor cannot circumvent the process to keep themselves safe in the presence of an insolvency professional and a resolution plan.
Distribution of assets
The Code provides for a waterfall mechanism for the distribution of assets on the liquidation of a sick company. This provides for a stronger corporate governance mechanism, wherein creditors’ rights are enhanced. The priority starts from securing the rights of secured creditors and workmen to payment of equity, which by its very nature is high risk-return. SICA, however, did not prescribe for a waterfall mechanism. The distribution was based on the provisions of the Companies Act, 1956.
Conclusion
The Code has revolutionized the process of insolvency resolution in India. While the revival of sick companies was governed by SICA in the past, now it falls under the ambit of the Code. The objective of the Legislature behind passing the Code was to plug all loopholes in the previous legislations and develop a faster resolution mechanism. The time stipulated under SICA to finally revive or liquidate a sick company often led to a complete deterioration of the value of the assets of such company. However, the Code ensures a faster mechanism to revive the corporate debtor and strengthens the creditors, thereby strengthening the corporate governance framework in India.
[1] Preamble, The Sick Industrial Companies (Special Provisions) Act, 1985.
[2] Sick Industrial Companies (Special Provisions) Repeal Act, 2003.
[3] Insolvency & Bankruptcy Code, 2016.
[4] J.K. Jute Mills Co. Ltd. v. Surendra Trading Co., CA (AT) No. 09/2017.
[5] Kristin van Zwieten, Corporate rescue in India: the influence of the courts, Journal of Corporate Law Studies, Vol. 1, 2015.