The Hindu Business Line : Sickening definition of sickness

THERE is not only a change in the Tribunal for addressing industrial sickness — the BIFR making way for the National Company Law Tribunal (NCLT) — but also in the very definition of industrial sickness.

Under the repealed Sick Industrial Companies (Special Provisions) Act, 1985 (the SICA), a moratorium period of five years was given before an industrial company could either embrace sickness or declared to be sick. But under the new dispensation for addressing industrial sickness that is a part of the Companies Act, 1956 itself, no moratorium period whatsoever seems to have been given as would be evident from the definition of `sick industrial company' given thereunder:

"`Sick industrial company' means an industrial company which has i) the accumulated losses in any financial year equal to 50 per cent or more of its average net worth during four years immediately preceding such financial year; or

ii) failed to repay its debts within any three consecutive quarters on demand made in writing for its repayment by a creditor or creditors of such company."

On a cursory reading of the above definition, one may say that moratorium period has after all not been done away with — if anything, it has been retained at the same level of five years.

On a careful reading, however, it is clear that the moratorium period has been completely done away with. For, had the four-year moratorium period been intended that would have been made a common factor for both clauses (i) and (ii).

In the event, every industrial company would inevitably and invariably have to press the panic button needlessly in vast majority of cases and a trifle prematurely in others. This would happen because no industrial company can start making profit from year one. Gestation period ranges from a couple of years to a decade.

Now witness this scenario. A power manufacturer has a capital of Rs 100 crore and in the first year it incurs a loss of Rs 50 crore, bulk of it thanks to huge start-up expenses that it is unable to capitalise in his books of account.

It would be unfair to brand it sick especially if there is nothing inherently wrong in its business plan and it is sure of turning the corner in a couple of years.

One may still contend that on the touchstone of accumulated losses, the moratorium period of five years has been retained. They may buttress their argument by pointing to absence of provisions similar to those contained in Section 43C of the Income-Tax Act which albeit in a totally different context says that if a company has been in existence for lesser number of years, the average figure would be found out by aggregating the total income for the years the company was in existence and dividing the same by those many number of years.

In any case, Parliament would do well to put the issue beyond the pale of doubt. If its intention is that only industrial companies that have been in existence for five years are candidates for being declared sick, it should say so in so many words. The second touchstone of adjudging an industrial company sick is even more ominous not the least because of its loose language.

Should a company be hauled over coals even if the amount involved is trivial? In the context of winding up on grounds of inability to pay back creditors, the law is well-settled — if there are genuine cross or counter claims by the company against the creditor, that would be an extenuating circumstance for not ordering its winding up.

This salutary position should have been incorporated in the definition of sickness in order to pre-empt a spate of needless references to the NCLT.

Again, it should not be non-repayment of any debt within three quarters that should trigger the sickness redressal mechanism — the debt should in the first place have become due in terms of the contract.

If all sorts of companies are mindlessly referred to NCLT, the deserving ones will be the worst sufferers what with the Tribunal squandering its time in separating and ejecting the undeserving ones from the heap.

(The author is a Delhi-based chartered accountant.)

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