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In an event that took more than a decade to fructify, the Ministry of Finance vide a notification [pdf] dated 25th November 2016, has repealed the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) with effect from 1 December this year.
In 2003, the Sick Industrial Companies (Special Provisions) Repeal Act was enacted which gave the Central Government the power to repeal SICA, and dissolve the BIFR. However, the Act was never notified.
Why did it take so long?
Alok Dhir, founding partner at Dhir & Dhir Associates, explains,
“When the [Sick Industrial Companies (Special Provisions) Repeal] Act was passed in 2003, the idea was to do away with the BIFR and let the Companies Act subsume powers of restructuring. But ever since, there have been several rounds of changes and counter changes, which finally led to the enactment of the Companies Act of 2013.
In fact, in this 13-year period, the constitutionality of the NCLT itself has been challenged. Now the dispensation that came along with the Companies Act of 2013 also became irrelevant in anticipation of the Insolvency and Bankruptcy Code, which was passed just earlier this year.
So the repeal could actually not be implemented- because if you repeal an Act, you need to put something else in its place.”
Until the enactment of the Insolvency and Bankruptcy Code, 2016 (IBC), SICA remained the only statutory rescue mechanism for ‘industrial companies’. Other categories of companies remained remediless, other than mechanisms under certain statutes applicable to banking companies and some State Relief Undertaking Acts.
While the Board for Industrial and Financial Reconstruction (BIFR), established under the SICA regime was introduced to expedite the revival of potentially viable units or closure of unviable units, it was often resorted to by promoters for delaying the recovery process
By declaring a company as ‘sick’, an inquiry under Section 16 of the SICA would be initiated. Section 22 mandated suspension of any legal proceedings against such company and, avoiding payment of statutory dues. With the management allowed to have charge over the company during the rehabilitation process, siphoning of assets would also be a regular occurrence.
The delays were augmented by routine challenges such as vacancies in the office of the BIFR, and a significant degree of court involvement in the resolution process, which defeated the purpose of its very existence.
An interim report submitted by the Bankruptcy Law Reform Committee in 2015, under the chairmanship of T.K. Vishwanathan, has discussed in length the reasons behind ‘the failure of the SICA regime’.
Following the repeal of SICA, all cases under the BIFR and the Appellate Authority for Industrial and Financial Reconstruction stand abated and fresh cases must be filed with the National Company Law Tribunal.
The enforcement of the IBC and repeal of SICA is being done in an almost synchronised manner, with the rules relating to Insolvency Professionals (IPs) [pdf] and Insolvency Professional Agencies (IPAs) [pdf] already notified. Two IPAs have already been registered, and two IPs are expected to be registered today.
However, confusion and uncertainty exists to the extent that the relevant corresponding provisions of the IBC, which allow initiation of resolution proceedings are yet to be notified.