Tuesday, November 29, 2016

Repeal of SICA

[The following guest post is contributed by Mani Gupta, who is a partner at Sarthak Advocates & Solicitors, New Delhi. Views expressed here are personal and do not reflect the firm’s views.]

By way of two notifications dated November 25, 2016 (“Repeal Notification”), the Ministry of Finance has appointed December 1, 2016 as the date on which the provisions of Sick Industrial Companies (Special Provisions) Repeal Act, 2003 (“SICA Repeal Act”) shall come into effect and Section 4(b) of the SICA Repeal Act shall be enforced. With the effectiveness of the SICA Repeal Act, the Sick Industrial Companies (Special Provisions) Act, 1985 (“SICA”) shall stand repealed and the Board for Industrial and Financial Reconstruction (“BIFR”) and the Appellate Authority for Industrial and Financial Reconstruction (“AAIFR”) shall stand dissolved. SICA was a special legislation that was enacted to identify sick and potentially sick companies owning industrial undertakings and for implementation of suitable measures to revive such sick companies, and to ensure expeditious enforcement proceedings against such companies. BIFR was established under SICA as a specialized body for revival, rehabilitation and even winding up of sick industrial companies and wherever necessary, for providing them with financial assistance.   

As the year of SICA Repeal Act suggests, the repeal of SICA has been on the cards for a very long time. Originally, separate provisions were inserted in Companies Act, 1956 (sections 424A to 424L) through the Companies (Second Amendment) Act, 2002 to deal with the revival and rehabilitation of sick industrial companies. These provisions were never notified. The Companies Act, 2013 also contained a new Chapter XIX (sections 253 to 269) to replace SICA as and when the SICA Repeal Act would have been notified. However, these provisions have been deleted with effect from November 15, 2016 by way of Notification No. S.O. 3453(E), 30/7/2016-Insolvency Section, which inter alia notified section 255 of the Insolvency and Bankruptcy Code, 2016 (“Insolvency Code”). The relevant provisions of the Insolvency Code, which provide an alternative mechanism in place of SICA, are yet to be made effective.

It is instructive to note that section 4(b) of the SICA Repeal Act was also amended by section 252 of the Insolvency Code. Section 252 of the Insolvency Code came into effect on November 1, 2016, by way of Notification No. S.O. 3355(E), 30/7/2016-Insolvency Section.[1] The effect of the amended section 4(b) is that from the date notified by the Government all proceedings pending before the BIFR and AAIFR shall abate and will come to an end.  However, it shall be open to the company whose appeal, reference or inquiry has abated to initiate fresh proceedings (that is, the corporate insolvency resolution process under the Insolvency Code) before the National Company Law Tribunal (“NCLT”) in accordance with the provisions of Insolvency Code, within 180 days of the commencement of the Insolvency Code. The Insolvency Code is being notified in a piecemeal manner, with the bulk of the operational provisions yet to be notified. Therefore, it is unclear when sick or potentially sick companies will be able to approach the NCLT and seek the initiation of the ameliorative process and the protection of section 14 of the Insolvency Code.  

It is important to note that the proceedings under the Insolvency Code envisage the role of Insolvency Resolution Professionals. The Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016, notified on November 23, 2016, provide that an individual enrolled with an insolvency professional agency as a professional member may make an application to seek registration as an insolvency professional. The Insolvency and Bankruptcy Board of India (Insolvency Professional Agencies) Regulations, 2016 (“IPA Regulations”) provide that only a company registered under section 8 of the Companies Act, 2013, with the sole object of functioning as an insolvency professional agency under the Insolvency Code shall be entitled to be registered as an insolvency professional agency (“IPA”). Since the IPA Regulations have come into effect only on November 21, 2016, it may still be some time before IPAs are incorporated and registered as such. They process of enrolling professionals as members of the IPA and the subsequent registration of insolvency professionals with the Insolvency and Bankruptcy Board may take some more time. Until then, it appears unlikely that the relevant provisions of the Insolvency Code, which could have effectively replaced the operational provisions of SICA, will be brought into effect. In fact, given the tight timelines under the Insolvency Code for the insolvency resolution process, it will be important that sufficient numbers of insolvency professionals are registered before the Insolvency Code is effectively operationalized. Given the workload that the insolvency professionals may face, if their numbers are limited, then they may find it difficult to meet the timelines prescribed in the Insolvency Code, or they may not able to do justice to their task.

This creates a peculiar situation: with the repeal of SICA, the protections that were available to companies under the provisions of SICA, in particular under section 22 of SICA, are no longer available. At the same time, the corresponding provisions of the Insolvency Code under which the relevant proceedings could have been initiated are yet to be notified. Such companies whose references/ appeals will abate on December 1, 2016 may face uncertainties as various proceedings initiated against such companies in various forums (such as recovery suits in civil courts or Debt Recovery Tribunals or winding up proceedings), which were suspended in view of section 22 of SICA may get revived or filed fresh. The problems of the sick/ potentially sick companies will be compounded if courts/ tribunals pass orders against them while the uncertainty around notification of the remaining provisions of Insolvency Code continues. The confusion and uncertainty could have been avoided if the SICA Repeal Act was brought into effect simultaneously with the provisions of Insolvency Code.   

- Mani Gupta




[1] The amended Section 4(b) of the SICA Repeal Act provides as follows:

“(b) On such date as may be notified by the Central Government in this behalf, any appeal preferred to the Appellate Authority or any reference made or inquiry pending to or before the Board or any proceeding of whatever nature pending before the Appellate Authority or the Board under the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) shall stand abated:

Provided that a company in respect of which such appeal or reference or inquiry stands abated under this clause may make reference to the National Company Law Tribunal under the Insolvency and Bankruptcy Code, 2016 within one hundred and eighty days from the commencement of the Insolvency and Bankruptcy Code, 2016 in accordance with the provisions of the Insolvency and Bankruptcy Code, 2016:

Provided further that no fees shall be payable for making such reference under the Insolvency and Bankruptcy Code, 2016 by a company whose appeal or reference or inquiry stands abated under this clause.”

2 comments:

Badrinath Srinivasan said...

Nice post!

Anonymous said...

The first read is too complex for a layman!!! A lot of people know that Promoters used SICA as an umbrella. How is this new code different? Looks the same! First NCLT, then NCALT and then Supreme Court. Till all this is done Creditors are held at bay. Looks as if Promoters will continue to enjoy. Also, in most cases, Banks who have doled out loans under dubious circumstances get away!!!!!

Is it possible to decode this new code for a layman?