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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.

THE SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT, 1985

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, 1993

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 COMPANIES (SECOND AMENDMENT) ACT, 2002

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.

SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) REPEAL ACT, 2003

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 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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