A major critique of Sickness defined in SICA 1985 is that it is based upon the net worth of companies but in defining

sickness, a more accurate picture would have been given by net debt default. It implies that by the time a company comes to BIFR, it is already terminally ill i.e. as per SICA norms there is an inordinate delay in the reportage of sickness and registration by the Board. There are also numerous instances where companies have fudged their annual accounts to seek shelter under SICA and save themselves from the various statutory and bank dues that they would have to pay otherwise. Reference to BIFR is also mandatory. As per SICA definitions, arises an asymmetry between the lender and the borrower which is more often than not, at the expense of the lender. A Lender would be declared as an NPA after 180 days default, but under SICA a company is declared when its net worth is equivalent or almost zero which makes revival an extremely wasteful and tedious process. The Board for Industrial and Financial Reconstruction (BIFR) continues to receive, on an average, about 45 references in a month of which roughly 30 are registered. There is a growing concern that SICA has lost its relevance in the era of liberalization. In May 2010, BIFR has received 7,472 cases, 4620 were disposed of and 1,031 cases were pending, 744 companies have been declared sick and winding up recommended in case of 1,229.Another major issue pertaining to revival is that in about 8% cases companies undergo mergers to revive themselves, and still abysmal 3% are recommended for change in management and the irony is that debtors continue the possession of assets in their entire course of events. They are the very same people who should be held accountable for the non-payment of dues of the creditors and the company going sick. In BIFR, references on an average undergo a delay of 3 years or more. A staggering 18 % of them get an illegitimate stay till the case gets rejected by the Board. Earlier companies would fudge their revenues to get DSCR ratio above 1.33, expect a 7-10 year sacrifice from their creditors but now the secured creditors go for One-Time Settlements (OTSs) and debtors still manage to squeeze the creditors. Creditors too want to book profit so they take hits on the equity. In 2002, the SARFESI Act was passed in which any creditor or set of creditors whose stake in the debt is 75% or above could take the company into liquidation to recover their dues. However, inspite of inordinate delays, very few secured creditors are seen to utilize this opportunity and save the public money from being fleeced by truant companies that have their cases pending at BIFR for more than a decade and a half. As per a report by Business Line, only less than 10% of sick companies in BIFR get revived as against those registered. Besides, it is seen as a vehicle abused by unscrupulous company promoters to provide themselves with a protective covering offered in SICA, 1985 and save themselves from legal suits and payment of dues. BIFR over the years has transformed from a facilitator and enforcer of revival programme of sick industrial undertakings into an inefficient court. Companies have been registered for BIFR for more than decade without any speedy revival plan. The board itself is chaired by retired bureaucrats with little experience or expertise in the area of bankruptcy rather than professionals. The major fundamental weaknesses of BIFR that have been identified are as follows: Very Late Detection of Sickness: The very definition of sickness is based on the premise that a company's accumulated losses have wiped out its net worth, which implies that the company

is a terminally sick case. In case of very little networth, the chances of revival become slim and the probability of turnaround is abysmal. Procedural Hurdles : the average mean delay as per a report by the Outlook magazine is about two years caused by tedious and cumbersome quasi-judicial procedures. There multiple forums and desks where the case travels. These delays help to keep creditors at bay and provide an increased bargaining power to errant management vis-s-vis secured creditors. Debtor as the Possessor : It is common knowledge that management always has greater access and possession to information than the shareholders and creditor of a company. It is ironic that the very same management that is accountable and responsible for sickness if a company is allowed to control the company during reorganization. It is obvious that if debtors are in possession then creditors would but be obliged to incur losses at the expense of promoters and management. The sacrifices made by banks and FIs in OTS is substantial and it is taxpayers money and cannot be in public interest as the government would have us believe. Complete violation of prioritization: It is widely known that during any case of bankruptcy, the hierarchy of settlement of dues in the following order: senior creditors, junior creditors and if any amount is left after settling all creditors then the claims shareholders are addressed. However, in BIFR we observe a violation of this rule and see that the incumbent management and shareholders (despite negative net worth) are rewarded at the expense of fully secured creditors.

Reform is expected once the Companies Bill (2002) is passed by the Parliament and the BIFR is overtaken by National Companies Law Tribunals (NCLT): Early detection Speed Voluntary references Facilitation and quick arbitration

NCLT must take initiative to change the definition of sickness based on debt default. The onus of sickness should be held with the company and the negotiations must be time bound. If this fails then an invite for a two part bid process must be scheduled in which the voting rights reside with the creditors of company but Indian Law requires liquidation by courts. Chk amount of ank credits in sick industries and NPAs as at any date post 2005. Therefore, quick reforms are required in bankruptcy laws itself. It is also important to bear that most of the sick companies that were referred to BIFR have had their death due to dearth of timely assistance from BIFR and led to wastage of natural resources. Hence, the logic that rather than have various bodies of government govern matters pertaining to merger/amalgamation, acquisition and reconstruction, revival and rehabilitation and winding up of Companies, a body should be constituted to handle all these matters and to dispose of all pending matters as well as fast disposal of new matters which might be referred to it in the future. Hence the Government constituted a Committee under the Chairmanship of Justice V. Balakrishna Eradi, a retired Supreme Court Judge, to review the law relating to

insolvency and Winding up of Companies and other laws like The Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) etc. The Eradi Committee made various recommendations with the primary objective of expediting the revival/ rehabilitation of a sick Company and protection of workers interest. Hence, It was suggested that to set up National Company Law Tribunal (NCLT) and and National Company Law Applet Tribunal (NCALT), wherein all the matters relating to companies which were earlier handled by various High Courts, CLB, BIFR and AAIFR will now be handled by the NCLT and Pending matters with the High Courts and CLB will be transferred to NCLT. Composition of the National Company Law Tribunal consists of a President and other Judicial and Technical Members the total constitution not exceeding 62 Members. No civil court shall entertain any suit or proceeding in respect of any matter which the Tribunal or the Appellate Tribunal is empowered to determine under the companies act. No court or authority shall issue injunction in any matter conferred upon Tribunal or the Appellate Tribunal under the companies act or any law time being in force. The NCLT has very wide powers in sanctioning or rejecting a scheme of compromise or arrangement. The NCLT shall have, inter alia, the following power: Power to stay any suit, at any time, after an application has been to it under section 391, until the disposition of the application, [Section 391 (6)]. Power to make an order for winding up if NCLT finds the scheme is not going to work with or without the modification; than in that situation it can make an order for the winding up Where the required majority has not proved the scheme, the question of the NCLT sanction the scheme does not arise. If incorrect information has been given to the NCLT before the meeting, then NCLT can after receiving the correct information, call the meeting. Power to issue order for repayment of dues of individual creditor. Power to recall its order. Power to look into commercial merits or demerits of the scheme. The establishment of NCLT will likely to reduce the reduce the time period of revival and winding up along with brining more companies in the ambit of sick companies by establishment of fund, change in definition of sick company and winding up procedures. It is recommended that funds for revival of sick companies must be maintained independently of Central Government to reduce from bureaucratic interference and ensure transparency. (Source: Majanudar A.K.(2009 14th Edition), Texmanns Compnay Law and Practice, Jhajjar, Taxmann Publication.)