Corporate sickness defies cure

Mohan R. Lavi | Updated on March 09, 2018 Published on November 27, 2013

Poor health facilities for Indian companies. — K.V. Srinivasan

From the days of BIFR to today’s Companies Bill, it’s been a pretty hopeless journey.

There is a story about a lady who was on her deathbed and was asking her doctor for possible remedies to prevent the inevitable. The doctor asked her to marry an accountant — this will not stall her death but make life seem longer.

Similar tales are being narrated of the Board for Industrial and Financial Reconstruction (BIFR). Like individuals, companies too can fall sick and can be nursed back to health too. The BIFR — set up under the Sick Industrial Companies (Special Provisions) Act, 1985 —was created in 1987 with the express intention of restoring sick companies back to health.

However, due to various reasons, the BIFR was not a stellar success and the number of companies that died a slow death far exceeded those revived quickly.

Roadblocks included lack of willingness on the part of promoters to chip in with resources or the keenness for a revival.

Supporting legislation provided ammunition to the lenders to adopt a carrot and stick approach. The carrot was the Corporate Debt Restructuring package wherein companies could sit across the table with bankers and work out a restructuring scheme; the stick was the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act of 2001-02 as per which the bankers could take over the properties that were mortgaged and sell them to set off their dues.

Noticing that the BIFR itself was turning sick, the Companies (Amendment) Bill 2001 proposed to set up a National Company Law Tribunal (NCLT) and a National Company Law Appellate Tribunal (NCLAT). These would take over the functions of the BIFR and other bodies and speed up the process of winding down sick companies. The jury is still out on how successful the Tribunal has been.

Companies Bill 2013

The Companies Bill, 2013 does its bit to fast-track rehabilitation of sick companies, spelling out the specifics in an entire Chapter (Chapter XIX) comprising 17 clauses (253-269).

If a company fails to pay back the debt of secured creditors, representing 50 per cent or more of its outstanding debt, within 30 days of the due date, any secured creditor may file an application to the Tribunal to have the company declared sick.

They can also make an application for the stay of any proceeding for the winding up of the company, to secure a right on the property and assets of the company.

The Tribunal has a time-frame of two months to make up its mind on whether the company is sick or not. If a company is declared sick, any secured creditor can ask the Tribunal to take steps for the revival and rehabilitation of such a company.

However, such a provision will not apply if the creditors have sought to recover their dues under under sub-section (4) of section 13 of the SARFAESI Act.

The Scheme of rehabilitation sanctioned can include financial reconstruction, management overhaul, amalgamation or takeover, sale or lease or rationalisation of personnel.

The Bill mandates creation of a rehabilitation and Insolvency Fund whose inflow would consist of grants from the Government, deposits made by companies, any other sources or income from investments, while the outflow would comprise payments to workmen, protecting the assets of the company or meeting the incidental costs during proceedings. While the Fund is a good move, its success would depend on how it is funded and how the funds received are distributed.

Limited Impact

The last few years have not been very good for business and thereby for their bankers. Even the prudential norms for loan losses prescribed by the Reserve Bank of India have been unable to prevent banks for taking deep hits.

Give an option to a banker today to choose between the aggressive SARFAESI and the amicable rehabilitation provisions provided in the Companies Bill, 2013, most would prefer SARFAESI.

The provisions in the Bill would apply only to companies that banks and creditors consider genuinely worth reviving — the list of such companies can probably be counted on one’s fingers. No revival provisions can be made for the wilful defaulter. Even the Companies Bill could be found wanting here.

(The author is Director, Finance, Ellucian)

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Published on November 27, 2013
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