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Presents The Power of 30!
A web series of 30 episodes covering different areas of corporate, securities and financial laws for the corporate professionals
across the country.
COPYRIGHT•The presentation is a property of Vinod Kothari &Co.
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TRANSITION FROM SICA TO IBC
10th October, 2018
Megha Mittal
Vinod Kothari & Company
01
02
03
04
LEGAL REGIME PRIOR TO IBCVarious laws applicable to insolvency.
THE ROUTE TO IBC
How we moved from SICA to
IBC
INSOLVENCY AND
BANKRUPTCY CODE, 2016
Introduction to the Code
and its features
THE TRANSITION
The transition, both legal and
procedural and analysis of the
impact of the transition
LEGAL REGIME PRIOR TO IBC, 2016
Sick Industrial Companies (Special Provisions), Act, 1985
SARFAESI Act, 2002
Recovery of Debts due to Banks and Financial Institutions Act, 1993 (“RDDBFI Act”)
Code of Civil Procedure, 1908
Companies Act, 1956 and 2013
Presidency Towns Insolvency Act, 1909
The Provincial Insolvency Act, 1920
Applicable to individuals
and Partnerships in
Mumbai, Kolkata and
Chennai only.
Applicable to individuals
and Partnerships in rest
of India.
WHAT WAS SICA, 1985 ?
The Sick Industrial Companies Act (SICA), applicable toindustrial companies, was a key piece of legislationdealing with the issue of rampant industrial sickness inIndia. SICA was enacted in India to detect sick orpotentially sick companies owning industrial undertakings,and their revival, if possible, or their closure, if not.
WHEN IS A COMPANY SICK ?
Existed for atleast5 years
Accumulated losses > entire Net Worth of
any F.Y.
SICK COMPANY
SICA (after the amendment proposed by the Goswami
Committee) a company to be sick when:
THE CONCEPT OF POTENTIALLY SICK COMPANIES
Existed for atleast 5
years
Accumulated losses > 50 % avg. Net Worth of prev. 4 F.Y.
has failed to repay debts to its creditor(s) in 3 consecutive quarters on
demand made
POTENTIALLY SICK
The concept of “potentially sick companies” was also recognized so as to ensure that
steps for its resolution and revival can be taken at an early stage:
SICA
BIFR-
Board of Industrial andFinancial Reconstruction
AAIFR-
Appellate Authority forIndustrial and FinancialReconstruction
QUASI-JUDICIAL BODIES UNDER SICA
THE “GOSWAMI COMMITTEE” REPORT (1/4)
Substantial rise in the“Outstanding Credit locked upin sick units” :-
•An increase of 18.4 % compound peryear from 1982-1989
•The average unpaid credit per largeand medium sized company almosttrebled.
•These company were also block largesums of real and nominal bank credit. 0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
1982 83 84 85 86 87 88 89
Outstanding Credit locked in sick units
Large and Medium Enterprises Total
Am
ount
in
Rs. (C
rore
s)
The Goswami Committee released in Report on Industrial sickness in July 1993 and its highlights are as
follows:
Detection at a stage where the accumulated losses are large enough to wipeout the equity base and reserves, it becomes extremely difficult to rehabilitatethe company.
Practical Problem: Too Late, Mate !
What is Net Worth ? : Assets – Outside Liabilities / Shareholders’ Equity
When is a co. Sick ? : Accumulated losses > N.W. of any F.Y.
It is thus, same as avoiding the symptoms of sickness and waiting for thecompany to be completely sick and only then go for cure.
THE “GOSWAMI COMMITTEE” REPORT (2/4)
SICA – A BACKWARD APPROACH
It was realised that SICA mainly focuses on the historical book value of the firms’assets rather than the prospective or future cash flows.
Practical problem faced: Assets are undervalued !
Example:- Suppose the mills/ plant of the company are situated in the prime locations,whose housing value far exceeds their use as mills/ plants. Thus, in this case it is verymuch possible that the realization from these assets enables the companies to meet itscurrent claims.
Therefore, in absence of restrictions imposed on sale, the company is not “sick” in truesense.
Thus, SICA’s definition of “sick company” creates a situation where seemingly sickcompanies far exceed the quantum of “truly sick” companies.
THE “GOSWAMI COMMITTEE” REPORT (3/4)
THE ROLE OF BIFR- A CONFUSION
THE “GOSWAMI COMMITTEE” REPORT (4/4)
arbitrating body
facilitating speedy
reorganization
Body of experts
trying to formulate
schemes for
rehabilitation
OR
PROPOSED SOLUTION:- The only role of BIFR should be that of a
fast-track facilitator and only occasionally, an arbitrator
THE PURPOSE & IT’S FAILURE
Part VIA (sections 424A to 424L) was introduced in the CompaniesAct, 1956 to provide for revival and rehabilitation of sickcompanies. National Company Law Tribunal (NCLT) and NationalCompany Law Appellate Tribunal (NCLAT) were to replace BIFRand AAIFR respectively through the said amendment. However, theprovisions were not notified and thus never enforced.
The Sick IndustrialCompanies (Specialprovisions) Repeal Act, 2003was enacted with the effectsas mentioned in the adjoiningfigure.
However, due to delay inconstitution of NCLT, SICARepeal Act was nevernotified.
WHAT & WHY ?
MAJOR IMPACTS
Repeal of SICA,
1985
Repeal of BIFR and
AAIFR
THE ROUTE TO IBC, 2016
Sick Industrial Companies
(Special Provisions) Act,1985
The GoswamiCommittee
Report, 1993
Companies Amendment
Act, 2002
Sick Industrial Companies
(Special Provisions)
Repeal Act of 2003,
Companies Act, 2013
Insolvency and
Bankruptcy Code, 2016
THE IBC TIMELINE
Sl. No. Date Event
1 21.12.2015 The Insolvency and Bankruptcy Bill was
introduced in Lok Sabha
2 28.04.2016 Joint Committee Report on IBC, 2016 was
published
3 05.05.2016 IBC, 2016 passed by Lok Sabha
4. 11.05.2016 IBC, 2016 passed by Rajya Sabha
5. 28.05.2016 President assent to IBC
+
Commencement of IBC
A FOREWORD The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of Indiawhich aims at creating a single law for insolvency and bankruptcy. It is a one stopsolution for resolving insolvencies which prior to its inception was a long process anddid not offer an economically viable arrangement.
Key highlights of IBC are:
A “One-
Stop”
Solution.
Clear,
coherent and
speedy
process
Stipulated
Timeframe
Maximisation
of value of
assets
INSOLVENCY: WHEN & HOW ?
As per IBC, 2016 A company issaid to be insolvent when:
a. There is a minimum default ofRs. 1,00,000.
b. The Central Gov. however hasthe power to increase thisminimum threshold to anyvalue not grater than Rs. 1crore
Default in
payment
Min. Rs. 1 Lakh
INSOLVENCY
THE FOUR PILLARS OF IBC Insolvency and Bankruptcy Code,
2016
Insolvency Regulator
Insolvency And Bankruptcy Board
of India
Information Utility Adjudicating Authority
National Company Law Tribunal
(for Co. And LLP)
Debt Resolution Tribunal
(for individuals and Partnership)
Insolvency Professional
TRANSITION FROM BIFR TO IBC (1/2)-THE PROCEDURAL DIFFERENCE
Procedure under SICA, 1985- a multi-stage process
Reference of the sick co. to BIFR
Enquiry by BIFR within 60 days of ref.
Order giving time to escape insolvency
Or
Order for preparation of rehabilitation scheme
Procedure under IBC, 2016- An integrated “Corporate Insolvency Resolution Process”
(CIRP)
Application to NCLT
Moratorium of 180/ 270 days for completion of CIRP
Insolvency Resolved
Or
Order of Liquidation
TRANSITION FROM BIFR TO IBC (1/2)-THE LEGAL DIFFERENCE
BASIS SICA, 1985 IBC, 2016
Trigger Point Existed for 5 years +
Accumulated Losses > Net Worth
of any F.Y.
Default > Rs.1 lakh
Timeline Reference of sick companies takes
1—2 years for further
investigation
Mandatory moratorium of 180/
270 days.
Practice BIFR and HCs were resistant in
passing liquidation Order
Despite liquidation being the last
resort, liquidation is the only way
out if moratorium expires.
Distribution of Assets Distribution as per Companies Act,
1956
As per the “Waterfall Mechanism”
u/s 53 of the Code
A CHANGE IN APPROACH (1/2)
• A Balance Sheet Approach
SICA
• A cash-flow approach
IBC The transition from SICA to
IBC replaced the “balance-
sheet” approach of
identifying sick companies
with a realistic “cash-flow
approach”
ILLUSTRATION:
X Ltd. has assets worth Rs. 100 crores. However, these assets are all overvalued and the company practically has no liquid assets.
A CHANGE IN APPROACH (2/2)
Is it sick as per SICA, 1985 i.e. As per the Balance sheet
Approach ?
Is it sick as per IBC, 2016 i.e. the Cash Flow Approach ?
PERFORMANCE ANALYSIS
Valuation of Assets
Time frame for completion of CIRP/
Liquidation process
Applications made by Corporate
Debtors for initiation of CIRP
Transparency of proceedings
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