The Hindu Business Line : An incomplete prescription

PETER Drucker once remarked: "The only things that evolve by themselves in an organisation are disorder, friction and malperformance." This malperformance results in the companies turning sick and in cases of chronic sickness, winding up. The Board for Industrial and Financial Reconstruction (BIFR), over the past two decades, has made a valiant effort to restructure/shutdown sick units. However, the BIFR came under public gaze when it had a huge backlog of cases, and statistics reflected that a few of the rehab schemes it had sanctioned turned worse after the rehab. While it would be unjust to blame the BIFR — restructuring Indian companies is not everyone's cup of tea — one looked at the new Concept Paper (CP) to see if any of the lessons of the BIFR era have been incorporated.

Concept Paper

The CP defines sick industrial company to mean any industrial company which has: i) accumulated losses in any financial year equal to 50 per cent or more of its average net worth during four years immediately preceding such financial year; and ii) failed to repay its debts within three consecutive quarters on demand made in writing for its repayment by a creditor or creditors of such company.

The National Company Law Tribunal (NCLT) is giving chartered accountants a business opportunity — it is intending to maintain a panel of auditors who are to issue a certificate prior to a reference being made to the BIFR. The joy appears to be short-lived since they are to certify the reasons for the erosion of the net worth of the company.

The CP takes into consideration the latest sensation in banking circles, the SARFAESI Act, by permitting SARFAESI cases too. However, if more than 75 per cent of the lenders gang up and possess the property, the case would be abated. The other provisions regarding making a reference, preparing and sanctioning of schemes, monitoring et al are not substantially different from the earlier BIFR era.

As it would be difficult to imagine a sick company bereft of any assets, the CP provides that where a sanctioned scheme provides for the transfer of any property or liability of the sick industrial company in favour of any other company or person or where such scheme provides for the transfer of any property or liability of any other company or person in favour of the sick industrial company, then, by virtue of, and to the extent provided in, the scheme, on and from the date of coming into operation of the sanctioned scheme or any provision thereof, the property shall be transferred to, and vest in, and the liability shall become the liability of, such other company or person or, as the case may be, the sick industrial company.

Litigious companies

In Madura Coats Ltd vs Bank of India (2004 46 CC B-111 Del- HC), Bank of India attempted to ward off its liability for Letters of Credit issued in favour of Madura Coats at the request of Hilton Rubbers Ltd, claiming that Hilton had become a sick company. The Delhi High Court asked the bank to pay up.

In Murablack India Ltd vs UBS AG and Ors (2004 47 CC B-27 Bombay-HC), Murablack, the sick candidate, requested UBS AG not to encash a bank guarantee issued by it in favour of a Swiss company, taking shelter under its chronic sickness and the protective umbrella of SICA. The court dismissed the petition.

In Kirti Prem Raj Jain vs Ved Prakash Gupta (2004 45 CC B-571 MP-HC), the Madhya Pradesh High Court held that the High Court under Section 482 of the Criminal Procedure Code cannot decide matters which were not raised before the Trial Court.

In the landmark Kusum Ingots and Alloys Ltd vs Pennar Paterson Securities Ltd (2000 2 SCC 745) case, the apex court held that merely because a company is declared a sick unit, prosecution under Section 138, 141 and 142 of the Negotiable Instruments Act and, pro tanto, for any other offence is not barred.

Dyna Lamps and Glass Works Ltd fought a case to prevent invoking a bank guarantee since the company issuing the guarantee was sick in the Dyna Lamps and Glass Works Ltd vs Union of India (2004 47 CC B-490) case. The court permitted invocation of the bank guarantee. There is an anecdote that says that to teach Johnny arithmetic, you should not only know arithmetic, but you should also know Johnny.

In Apple Finance Ltd vs Mantri Housing and Constructions Ltd (2004 47 CC B-72), it was held that not only should a company be registered for a period of five years, but it should also be an industrial company.

The course of action

The CP should have considered the ratio of the important decisions as they have evolved over the years and incorporated them into the provisions relating to sick companies. That way, it would ensure that the NCLT focuses on reviving sick companies rather than appear in High Courts to win cases against companies trying to prevent banks from encashing guarantees. What it appears to have done now is to try to incorporate a few provisions of the BIFR Act, provide timeframes for filing references and sanctioning schemes, and elaborate on procedures for appointment of directors and special directors. While all this could be administrative, it cannot be ameliorative for a sick company.

(The author is Hyderabad-based chartered accountant.)

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