The Sick Industrial Companies (Special Provisions) Act, 1985 (“SICA”) was formulated with the objective of detecting sick and potentially sick industrial companies, and formulating preventive, ameliorative, remedial and other measures for them. Under SICA, an industrial company of at least 5 years vintage which had accumulated losses equal to or exceeding its entire net worth at the end of a financial year was deemed to be a ‘sick’ industrial company. If an industrial company became sick, its board of directors were required to make a reference to the Board of Industrial and Financial Reconstruction (“BIFR”) to determine measures to be adopted to revive or rehabilitate the ‘sick’ industrial company. If any inquiry was pending under SICA or any scheme was being framed or implemented under SICA, then all legal proceedings against such companies in relation to winding-up, execution against their properties, recovery of money or enforcement of security or guarantee were automatically suspended. As a result, SICA received wide criticism because it was often misused by borrowers as a tool to protract and frustrate recovery proceedings initiated by lenders.
This was one of the primary reasons why the Sick Industrial Companies (Special Provisions) Repeal Act, 2003, (“SICA Repeal Act”) was passed by Parliament in 2003 to repeal the SICA. However, the provisions of the SICA Repeal Act were not notified and the mechanisms under SICA continued to operate and flourish. Finally, after more than a decade, the Ministry Finance has notified the provisions of the SICA Repeal Act and made it effective. This follows on the heels of a recent notification by way of which, inter alia, certain provisions under the Companies Act, 2013 pertaining to revival and rehabilitation of sick companies were omitted.
Repeal and Consequences: With the SICA Repeal Act coming into force from December 1, 2016, SICA will stand repealed entirely and the BIFR and the Appellate Authority for Industrial and Financial Reconstruction (“Appellate Authority”) constituted under SICA will stand dissolved. Further, from December 1, 2016, any appeal, reference, proceeding or inquiry pending before the BIFR or the Appellate Authority is automatically abated. As a result of such abatement, the protection and relief afforded to ‘sick’ or ‘potentially sick’ companies under SICA by way of automatic suspension of legal proceedings against such companies shall no longer be available.
Implication for Borrowers: Any company in respect of which such appeal, reference, proceeding or inquiry has abated has an option of making a reference to the National Company Law Tribunal (“NCLT”) in accordance with the provisions of the Insolvency and Bankruptcy Code, 2016 (“Insolvency Code”) within 180 days from the commencement of the relevant provisions of the Insolvency Code. This would mean that companies can make an application to the NCLT to commence the insolvency resolution process.
Implication for Creditors: Once the proceedings under SICA abate, the suspension of other legal proceedings would also be lifted and creditors will be able to initiate steps towards recovery of their debt and enforcement of any security and guarantees provided to them. Given that the limitation period to initiate legal proceedings was suspended if any reference was made under SICA or proceedings were pending thereunder, creditors would have some additional time to initiate legal proceedings against borrowers. Further, creditors will be able to initiate the insolvency resolution process in accordance with the Insolvency Code.
Conclusion: The notification of the SICA Repeal Act was a much awaited and welcome move. This notification is amongst the several steps that have already been taken by the Indian Government in the recent past towards its concerted efforts of redesigning the resolution and insolvency framework in India. With the repeal of SICA, implementation of the Insolvency Code and consolidation of laws and multiple judicial fora relating to recovery and insolvency, the resolution of distressed companies (either by way of revival or winding up, whichever is viable) is expected to be speedier.