CORPORATE RESTRUCTURING - REVIVAL & RESTRUCTURING OF SICK COMPANIES

REVIVAL

It is necessary to make all attempts to revive the company rather than close it.

 

Major causes of sickness of industrial companies

1. Inability of management to keep a constant vigil over competitive forces
2. Inability of management to focus on continued viability of the industrial unit
3. Inability of management to introduce dynamic changes to suit the development taking place in the industry
4. Lack of serious efforts to combat sickness at the initial stage and to take efforts to revive it
5. Lack of adequate and quality manpower
6. Lack of funds required for meeting replenishment and much needed modernization and up gradation programmes
7. Technological obsolescence
8. Sweeping changes across the industry
9. Political and economic factors
10. Change in consumer behaviour
11. Lack of timely government support
12. Mismanagement by directors
13. Diversion and misapplication of funds
14. Reckless investments in other businesses
15. Disproportionate investments

 

 

Reasons for Industrial Sickness

 

A)    Internal Causes

1) Project related - under estimation of project cost, non availability of critical information having a vital bearing on the project, delayed project implementation and resultant cost escalation

2) Human resource related – poor quality management, excessive commitment to non appropriate policies, poor financial/marketing/management control, management succession problems, poor inter-personal and inter-departmental coordination

3) Performance related – faulty choice of product/technology, under utilisation of available resources, inadequacy of working capital, diversion of funds, inadequate market forecast

 

B)    External Causes

1) Non cooperative government policies

2) Recession/adverse economic conditions

3)  Powerful competitors in market

4)  Non availability and shortage of inputs

5) Regional and industry-wise phenomena

6) Technological advancement

7)  Delayed financial assistance

 

 

Why Revival Should Be Undertaken

Revival should be undertaken as winding up of a company would result in:

A)    Closing down of unit which provided some goods or services

B)    It would throw out of employment numerous persons resulting in grave hardship

C)    Loss of revenue to the state

D)    Scarcity of goods and diminishing employment opportunities

 

 

Sick Industrial Company

It means an industrial company (being a company registered for not less than 5 years, which has at the end of any financial year accumulated losses equal to or exceeding its entire “net worth”.

 

Net Worth

Means sum of the paid up capital and free reserves.

 

Preparation and Sanction of Scheme for Revival

 

Where an industrial company, has become a sick industrial company, the Board of directors of such company shall make a reference to the Tribunal and prepare a scheme of its revival and rehabilitation and submit the same to the Tribunal along with an application containing such particulars as may be prescribed for determination of the measures which may be adopted with respect to such company:

 

If the Tribunal appoints an operating agency in order to conduct an enquiry that a company has become a sick industrial company, then the industrial agency is required to prepare and submit a schedule in respect of referred company by providing the following measures:

A)    Financial reconstruction

B)    Proper management of sick industrial company by change in, or takeover of

C)    The amalgamation of the sick industrial company or vice-versa

 

The Tribunal may finalize the scheme on the suggestion of the operating agency and thereafter formally sanction the scheme referred to as “sanctioned scheme”.

 

 

Winding Up of Sick Industrial Company

Where the Tribunal, after making inquiry under section 424B and after consideration of all the relevant facts and circumstances and after giving an opportunity of being heard to all concerned parties, is of the opinion that the sick industrial company is not likely to make its net worth exceed the accumulated losses within a reasonable time while meeting all its financial obligations and that the company as a result thereof is not likely to become viable in future and that it is just and equitable that the company should be wound up, it may record its findings and order winding up of the company.

 For the purpose of winding up of the sick industrial company, the Tribunal may appoint any officer of the operating agency, if the operating agency gives its consent, as the liquidator of such industrial company and the officer so appointed shall for the purpose of the winding-up of such sick industrial company be deemed to be, and have all the powers of, the official liquidator under this Act.

 Notwithstanding anything contained in Para 2 above, the Tribunal may cause to be sold the assets of the sick industrial company in such manner as it may deem fit and pass orders for distribution in accordance with the provisions of section 529A, and other provisions of this Act.

Without prejudice to the other provisions contained in this Act, the winding up of a company shall, as far as may be, conclude within one year from the date of the order made by Tribunal

 

Penalty for certain offences

Whoever violates the provisions of any scheme, or any order, of the Tribunal or the Appellate Tribunal or makes a false statement or gives false evidence to the Tribunal or the Appellate Tribunal, and attempts to tamper the records of reference or appeal filed under this Act, he shall be punishable with simple imprisonment for a term which may extend to three years or shall be liable to fine not exceeding ten lakh rupees.

No court shall take cognizance of any offence under except on a complaint in writing of an officer of the Tribunal or the Appellate Tribunal or any officer of the Central Government authorized by it or any officer of an operating agency as may be authorized in this behalf by the Tribunal or the Appellate Tribunal, as the case may be.

 

Direction not to dispose of assets

The Tribunal may, if it is of the opinion, that any direction is necessary in the interest of the sick industrial company or creditors or shareholders or in the public interest, by order, direct such company not to dispose of, except with the prior approval of the Tribunal, any of its assets during the period of inquiry under section 424B or during the period of preparation or consideration of the scheme under section 424C.