Revival and Rehabilitation of Sick Companies
Revival and Rehabilitation of Sick Companies in India
1. Introduction
A sick company is a company that is financially distressed, unable to pay its debts, or its net worth has been eroded. The revival and rehabilitation process aims to save such companies from going into liquidation and to protect the interests of various stakeholders, including employees, creditors, and shareholders.
2. Definition of a Sick Company
The definition is provided in Section 3(1)(o) of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA):
A company registered for at least 5 years.
Whose accumulated losses equal or exceed the entire net worth.
Or is unable to pay its debts.
Note: SICA was repealed and replaced by the Insolvency and Bankruptcy Code (IBC), 2016, but the concept of sick companies and revival remains crucial.
3. Legal Framework for Revival and Rehabilitation
a) Under Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) (Now repealed)
The Board for Industrial and Financial Reconstruction (BIFR) was the authority responsible for identifying and reviving sick companies.
Companies could apply to BIFR for a rehabilitation scheme.
The BIFR had the power to approve schemes of revival, restructuring, and financial assistance.
The process involved assessment, sanction of revival plans, and monitoring implementation.
b) Under Insolvency and Bankruptcy Code (IBC), 2016
Section 10 of the IBC provides for corporate insolvency resolution process (CIRP).
The aim is to revive companies through a time-bound resolution plan.
If revival is not possible, liquidation is the alternative.
Resolution professionals and committees of creditors manage the process.
Emphasis is on maximizing value and protecting stakeholder interests.
4. Process of Revival and Rehabilitation
Identification of a sick company (financial distress).
Application to the relevant authority (BIFR earlier, NCLT now under IBC).
Assessment of the company’s financial position.
Preparation of revival scheme — may include:
Restructuring debt.
Infusion of fresh capital.
Management changes.
Operational turnaround.
Approval of the scheme by creditors and authority.
Implementation and monitoring of the plan.
Successful revival or liquidation if revival fails.
5. Key Objectives
Protect employment and avoid mass layoffs.
Safeguard creditors' and shareholders’ interests.
Maintain production and economic stability.
Avoid wastage of assets and resources.
Restore the company to profitability.
6. Important Case Laws
🔹 Sundaram Finance Ltd. v. NEPC India Ltd., AIR 1999 SC 2856
Held: BIFR’s power to sanction revival schemes is quasi-judicial.
The scheme must be fair, feasible, and in public interest.
Emphasized protecting interests of all stakeholders, including employees.
🔹 ICICI Bank Ltd. v. Official Liquidator, Bombay High Court (2004)
Held: Revival schemes must be practical and not merely cosmetic.
The court rejected schemes that were not viable or realistic.
🔹 Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors. (2019) 4 SCC 17
Related to the constitutionality of the IBC.
The Supreme Court upheld IBC as a legitimate commercial legislation for revival and resolution of insolvent companies.
Emphasized time-bound resolution for efficient revival.
🔹 K. Sashidhar v. Indian Overseas Bank (2019) 7 SCC 338
Clarified the powers and duties of the Resolution Professional under IBC.
Reiterated the purpose of revival and maximization of value for stakeholders.
7. Differences Between Old and New Regime
| Aspect | SICA (Old Regime) | IBC (New Regime) |
|---|---|---|
| Authority | BIFR (Board for Industrial & Financial Reconstruction) | NCLT (National Company Law Tribunal) |
| Time frame | No strict timelines | 180 days (extendable up to 270 days) |
| Focus | Revival and rehabilitation primarily | Revival through resolution or liquidation |
| Creditor role | Limited role | Central role through Committee of Creditors |
| Resolution professional | Not specified | Resolution Professional appointed |
| Enforcement | Often delayed | Time-bound and efficient |
8. Challenges in Revival and Rehabilitation
Delay in decision making and approval.
Lack of cooperation between promoters and creditors.
Financial complexities and market uncertainties.
Resistance from employees or unions.
Difficulty in raising fresh capital.
9. Conclusion
The revival and rehabilitation of sick companies are crucial for economic stability and employment preservation. The legal framework has evolved from the SICA to the more dynamic and time-bound IBC process, which emphasizes swift resolution and balancing interests of all stakeholders. The judiciary has played an important role in ensuring that revival schemes are feasible, fair, and promote the public interest.
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