This article is written by Sanket Deshpande pursuing Certificate Course in National Company Law Tribunal (NCLT) Litigation from LawSikho.
Indian economy is rebounding itself and it is rebounding itself for the greater good. The era of liberalisation, privatisation, and globalisation has thrown open doors for many significant changes in the economy. But although there is a brighter side to it, there is also a negative side, and that negative side is the difficulties faced by many industries to sustain this cutthroat competition, which has led to what is popularly known as Industrial Sickness. In the last few years, the government of India has taken many steps to cure this problem of sickness. Both the large and small scale industries are seeing exponential growth in industrial sickness. It has amplified the problems of owners, labourers, creditors, vendors. There have been several legislative steps that have been taken by the government of India, to revive and rehabilitate the sick industries. One such legislation is Sick Industries Companies Act, 1985 and another is enactments under the Companies Act, 1956 and then Companies Act, 2013.
This application deals with how to revive and rehabilitate a company, with a primary focus on the Companies Act, 2013. It is relevant to focus on Chapter XIX of the Companies Act, 2013 exclusively deals with revival and rehabilitation, the committee of creditors, the appointment of administrators which includes interim administrators as well, powers and duties of company administrators, winding up of the company on the report of the administrator, punishment of certain offences, assessment of damages, etc.
Section 253 of the Companies Act, 2013
Section 253 of the Companies Act, 2013 deals with the determination of sickness of the company and it states the following;
- Any secured creditor of the company who has more than 50% of the outstanding amount of debt due, and such a secured creditor has not received the said amount or the company has failed to pay the amount due to his complete satisfaction or secure or compound the same within a period of 30 days of the demand notice then such a secured creditor can file an application before the tribunal with all relevant documents as annexures evidencing default.
- The tribunal will then on the receipt of the said application check for its merits within 60 days whether the company has become sick or not.
- On being satisfied that the company is a sick company and it is in a position to repay its debts, the tribunal shall pass an order to that effect.
- The tribunal shall give a reasonable time to the company to repay its debts.
Definition of the revival of a company
The term revival of the company can be understood based on certain scenarios. In case a company fails to commence a business with a year of its incorporation or has not been carrying any business or is not operating for two financial years, or fails to submit some yearly returns then it so happens that the Registrar may insert the company into a strike off. And this forbids the company from doing any operation. So in order to make it operational or active again, the process is called the revival of a company.
Definition of rehabilitation of a company
In the case of companies that are determined sick, the rehabilitation scheme would involve a change in management, financial mandates, employee rehabilitation, and the preparation of an elaborate scheme for the same. It’s about the rehabilitation of the company into a better profitable structure.
Section 254 of the Companies Act, 2013
Sec 254 of the Companies Act, 2013 provides for the application for revival and rehabilitation. According to the said provision, any sick company may make an application to the tribunal in order to take necessary steps for its revival and rehabilitation and the said application needs to be accompanied by,
- Audited financial results of the company relating to immediately preceding financial year,
- Documents authenticated in a reasonable manner and also the relevant fees paid,
- Draft scheme for revival.
It is important to note here that the said application has to be made within a period of 60 days from the date of determination of the company as a sick company.
Section 256 of the Companies Act, 2013
After the presentation of the application under Section 254 for the revival and rehabilitation of the company, the tribunal shall appoint an interim administrator. The interim administrator has the following responsibilities carved out for him;
- Within 45 days call for a meeting of the creditors of the company.
- Prepare a draft scheme for revival and present it before the tribunal within 60 days from the meeting.
- In case there is no such draft scheme prepared then the interim administrator shall take over the entire management and the administration of the company. And it shall be the responsibility of the management to provide full assistance and cooperation to the interim administrator.
Section 257 of the Companies Act, 2013
As per Section 257 of the Companies Act, 2013 the interim administrator shall appoint a committee of creditors not exceeding seven and such number of creditors as he may determine. These creditors shall meet in the meeting and the interim administrator shall direct directors, promoter, and all key managerial personnel of the company to furnish all the required information as required.
Orders for the appointment of the administrator
If at the date of the hearing a resolution is passed by at least three fourth members of the company that it is impossible to revive or rehabilitate the company which is sick. Then by adopting such measures the sick company shall be revived or rehabilitated then the tribunal may pass such orders for the appointment of the administrator who shall discharge such functions as may be necessary under the act.
Section 261 of the Companies Act, 2013
As per Section 261 of the Companies Act, 2013 a scheme is to be prepared by the company administrator which shall include the following –
- Financial reconstruction of a sick company.
- The amalgamation of a sick company.
- A takeover of a sick company by a solvent company.
- Sale or leasing out of a part of assets of the company.
- Rationalization of managerial personnel.
- Or such other measures as may be deemed fit and necessary.
Section 263 of the Companies Act, 2013
A company shall be wound up if the scheme is not approved by the creditors and the administrator shall submit a report to that effect, pursuant to which the tribunal shall pass an order winding up the company.
Section 266 of the Companies Act, 2013
As per Section 266 of the Companies Act, 2013 the tribunal also has powers to take action against delinquent directors, under the said provision if in the course of scrutiny or implementation the tribunal comes to a conclusion that any person who has taken part in the promotion, formation or management of the sick company including a manager or an officer or an employee;
- Has misapplied or retained, or become liable or accountable for, any money or property of the sick company; or
- Has been guilty of any misfeasance, malfeasance, non-feasance, or breach of trust in relation to the sick company,
It may then direct such person to repay or restore the money or property, with or without interest, as it thinks just or in the alternative to contributing to the assets of the sick company.
If also the tribunal is satisfied on the basis of the information or evidence that any person who was a director or officer of the company and has diverted the funds or property of the company for the purpose other than that for which it was allotted or has managed the affairs of the company on a manner that it is detrimental to the company then the tribunal has the power to direct the financial institutions to not to provide any financial assistance to such a person or any company or firm or body corporate. Such a person is a director for a period of 10 years and also to disqualify such a person for being appointed as a director for a period of 6 years.
Bar on jurisdiction
Section 268 of the Companies Act, 2013 bars the jurisdiction of the civil court or any other court in respect of any action taken or order passed under this provision, and no court shall grant any injunction in respect of the same. This means that the exclusive jurisdiction, in this case, rests only with the Tribunal or the Appellate Tribunal.
Punishment for violating the provisions
Whoever violates the provisions of this chapter or gives false evidence or makes any false statement then said person shall be liable to be punished with 7 years of imprisonment and with a fine which may extend to ten lakh rupees.
Section 269 of the Companies Act, 2013
As per Section 269 of the Companies Act, 2013 there shall be a fund maintained by the company which shall be called Rehabilitation and Insolvency Fund. This fund will be utilized for the revival, rehabilitation, and liquidation measures of the sick company.
Case law: Pazaniappa Chettiar v. South Indian Planting and Industrial Co Ltd,(1953)
A notification was published in the Government Gazette by the Registrar of Joint Stock Companies stating that the company had not been working for some time and that if no ground could be shown within a specified time, the company will be removed from the register within three months. The removal was in fact effected only on 14.3.1936. On 28.3.1936, an application was presented before the court for the restoration of the company back to the register. The application was allowed and the company was restored to the register. On 31.8.1930, the company resolved to go into voluntary liquidation. It was held in this case that even if the company is determined as sick by the tribunal, then also the rights and liabilities of the company will remain the same.
The problem of sickness has been increasing off late due to lack of good governance at the corporate level, and uncertain government policies. In the present scenario of COVID-19, it will further multiply. Thus the Companies Act, 2013 provides for a very comprehensive framework for the revival and rehabilitation of sick companies through the tribunal.
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