A company with accumulated losses equal to or exceeding its net worth is called a sick company. The Companies Act 2013 prescribes a legal procedure for reviving and rehabilitating sick companies. The administrator forms a committee of secured and unsecured creditors as directed by the Act for approving the preparation and implementation of the scheme.
A sick company is financially struggling with accumulated losses more than or equal to its net worth. In the worst-case scenario, the sick company must be winded up due to financial troubles. Winding up a company should be avoided because it leads to loss of government revenue, jobs, and money for creditors. The Companies Act 2013 prescribes a detailed legal procedure for reviving and rehabilitating sick companies. This is a project undertaken to revive a sick company.
Did you Know?- Sick companies were governed by The Sick Industrial Companies (Special Provisions) Act 1985. The Act was later repealed, and its relevant provisions were included in the Companies Act 2013.
What is a Sick Company?
As per the Sick Industrial Companies (Special Provisions) Act 1985, a sick company is registered for not less than five years and has accumulated losses equal to or exceeding its net worth. A company's net worth is the total value of assets after deducting liabilities.
What is the Rehabilitation of Sick Units?
Revival and rehabilitation of sick companies refer to taking corrective steps to bring the declining company into a better financial position. It includes measures like:
- Changing the company's management
- Amalgamating the company with another company
- Selling or leasing business assets or business units of the company.
Procedure for Revival and Rehabilitation of Sick Companies
The detailed procedure for reviving and rehabilitating sick companies is prescribed under Chapter XIX, Section 253 of the Companies Act 2013. Though the process is timel.-consuming, it is beneficial
Step 1. Determination of Company Sickness
In the first part of the procedure, the Tribunal determines whether the company is a sick company. The following steps do:
Filing an Application for Determination of Sickness of the Company.
- Any secured creditor representing 50% or more of the company's outstanding debt is allowed to file this application with the Tribunal.
- A secured creditor can apply if the company has not-Paid the outstanding debt amount within thirty days of sending the demand notice.
- Secured or compounded the loan as requested by the creditors. The creditors must submit evidence proving that the company has not repaid the loan, offered any security for the loan, or failed to compound it.
- Order Passed by the Tribunal
The tribunal considers all facts, circumstances, and documents provided to it to decide whether the company is a sick company. It will issue an order about this within 60 days of receiving the application. If the Tribunal determines that the company is a sick unit, further procedures are to be followed.
Step 2: Submitting an Application for Revival and Rehabilitation to the Tribunal
Any secured creditor of the company or the sick company itself can apply to the Tribunal for deciding measures to revive and rehabilitate the company. Along with the application, the following documents also have to be submitted:
- The company's audited financial statements for the previous financial year.
- A draft scheme for the revival and rehabilitation of the sick company. If the company has not prepared a draft scheme, it should attach a declaration of the same with the application.
- Other information and documents, duly authenticated as required, along with fees.
Step 3: Appointing an Interim Administrator
- The Tribunal shall announce a date for a hearing for the determination of sickness in the company. It will appoint an interim administrator within seven days of receiving the application.
- The interim administrator will conduct a meeting of the committee of creditors. This meeting is scheduled within 45 days of the tribunal's order.
- He shall consider whether the revival and rehabilitation of the sick company are possible based on the draft scheme submitted to the Tribunal.
- Within 60 days of the order date, the interim administrator must submit a report to the tribunal.
- If the company has not submitted a draft scheme, the tribunal will instruct an interim administrator to handle its affairs.
- In addition to being in charge of the company's management, the company's existing staff and management will assist and help him when necessary.
Step 4: Forming a Committee of Creditors
- The interim administrator will form a committee of creditors. This committee will have seven or fewer members.
- The representatives of each class of creditors will be on this committee.
- The interim administrator can ask directors, promoters, or key managerial people to attend the meeting.
- He can also ask them to provide any information or documents needed at the meeting.
Step 5: Order of the Tribunal
- On the hearing date fixed earlier, the Tribunal shall pass an order regarding the company's revival and rehabilitation.
- The tribunal decides whether the company can be revived or rehabilitated.
- If it concludes that it is possible to revive or rehabilitate the company, it will appoint a person to prepare a draft scheme.
However, if it concludes that reviving or rehabilitating the company is not feasible, it can order its winding up or dissolution.
Step 6: Appointing a Company Administrator
- The Tribunal shall appoint a company administrator from a database of qualified professionals.
- He is responsible for executing this project undertaken to revive a sick company.
- He will design a scheme to revive the sick unit, and the Tribunal can also order him to take over the company's management.
- The administrator can use suitable experts to manage the company.
Step 7: Preparing a Scheme for Revival and Rehabilitation
- The company administrator shall prepare a scheme of revival and rehabilitation after considering the draft scheme filed by the company.
- The scheme can include steps like financial reconstruction, change or takeover of management, amalgamation of the company with another company, or selling or leasing the company's assets.
Step 8: Submitting the Scheme to the Tribunal
The administrator will present the scheme for the revival of sick units to the committee of creditors at a meeting convened within 60 days of his appointment. He shall arrange separate meetings for secured and unsecured creditors.
- Unsecured creditors represent one-fourth of the amount payable by the company to them and
- Secured creditors represent three-fourths of the amount payable for the financial assistance the creditors give the company.
If the scheme is approved, the administrator will submit it to the Tribunal.
The Tribunal can sanction, modify, or order the company's winding up.
Sanction of the Scheme
If the Tribunal is satisfied that it is possible to implement the scheme for rehabilitation of the sick unit, it will sanction the scheme. The scheme must be sanctioned within 60 days of the Tribunal receiving the application.
Implementation of the Scheme
A sanctioned scheme is binding on the sick company, its employees, shareholders, creditors, guarantors, and the amalgamating company.The Tribunal will authorise the company administrator to implement the scheme.He will need to submit reports on the implementation from time to time.
Modification of the Scheme
If it is challenging to implement the sanctioned scheme or if the implementation fails, the company administrator can apply to modify the scheme.If no administrator is appointed, the company or its secured creditors can make the application.
Winding Up of the Sick Company
If the creditors reject the proposed scheme for the revival and rehabilitation of the sick industrial company, the administrator will submit a report to the Tribunal within 15 days.The Tribunal will order that the company should be wound up or dissolved.
The Companies Act describes a process for the revival and rehabilitation of sick industrial companies to help them in times of crisis. It helps save jobs, tax revenue, and losses incurred by company creditors. The Companies Act 2013 prescribes a procedure for identifying, reviving and rehabilitating sick companies.
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