The Centre will soon reform a key provision relating to the winding up and reconstruction of companies as part of the new Company?s Bill-2008.

Currently, mischievous promoters take advantage of the Sick Industrial Companies Act (SICA) by declaring their companies sick. In such cases creditors cannot initiate recovery proceedings against them since the matter subsequently gets referred to the Board of Industrial Finance and Reconstruction, which through hearings prepare a revival package. This particular provision will now be changed in favour of the creditors.

The qualification of a ?sick company? on the basis of reduction in the net worth, as it existed earlier, will no longer be applicable. Earlier a company was considered sick when its net worth was reduced to zero or was in negative. According to the new provision, if the company defaults in making the payment of its debts on time then any interested party ?shareholders or creditors ?can file application before the company tribunal. The tribunal then will decide whether the company is sick or not.

Till now, for undertaking restructuring like mergers, amalgamation, de-mergers, capital restructuring, the companies were required to take prior approvals from the high court. Now, this power will shift to special tribunals. This will hasten the whole process and would also be less time-consuming.

The Bill does away with SICA and the provisions for revival and liquidation of companies. It will now contain in the Company?s Act itself. The definition of sick companies is also proposed to be re-cast so as to prevent mischievous promoters to misuse the definition. Also, the revival and liquidation of sick companies would become easier, more transparent and a balance between the interest of the shareholders and creditors would be achieved.

The provisions as regards revival and rehabilitation of sick companies have undergone significant changes with special powers being imparted to the creditors of the sick companies. The Bill empowers the secured creditors, representing at least 50% in value of their outstanding debt for which payment has not been secured to their reasonable satisfaction within 30 days of the issue of demand notice to the company to file an application to the tribunal to declare such a company as sick company.

According to corporate law firm Fox Mandal, ?The new provision is welcome in the sense that it will change the definition of sick companies. This changed definition would not allow the fraudulent promoters to misuse the provisions of revival of sick companies. The new provision would lay down specific timelines in respect of submission of revival schemes of the company, their approval and implementation. This is a big change which was not there before in the Companies Act -1956.?

The tribunal would appoint an interim administrator which would look after this matter and would also form a committee of company creditors. The interim administrator along with the committee of the company creditors will decide whether it is possible to rehabilitate and revive the company. If the tribunal is satisfied with the report of the interim administrator indicating that it is not possible to rehabilitate and revive the company, then in such a case the tribunal will order the proceedings for the winding up.

If the committee believes that the survival of the company is possible then the tribunal will appoint a company administrator. The revival strategy is to be devised by the company administrator by way of various means prescribed under the Bill. The strategy has to be formulated in consultation with various creditors, and should be approved by 25% of the unsecured creditors and 75% of the secured creditors. In case there is a proposal to amalgamate the sick company with any other company then this has to be approved by the shareholders of both the companies by way of a special resolution as a part of the revival strategy. If such a strategy is not approved by the creditors, then the tribunal can order the sick company to be wound up.