On September 8, the beleaguered Kanpur-based scooter manufacturer LML declared itself a sick company.
The Sick Industrial Companies Act, meant to rescue firms, is driving many into liquidation
NEW DELHI: On September 8, the beleaguered Kanpur-based scooter manufacturer LML declared itself a sick company - its entire net worth has been eroded - and announced that it will approach the Board of Industrial and Financial Reconstruction (BIFR) for help in getting back on its feet.
In August, Duncans Industries, the flagship company of the G P Goenka group, referred itself to the BIFR. The BIFR will now decide whether the claims of the two companies are genuine, whether they can be revived, wound up and liquidated.
But liquidation, if recommended, could take a few more years. Till then, they will enjoy immunity from proceedings under any other law. If BIFR accepts the company’s case, it could take one week to two months.
As of March 31, 2005, there were 6,259 companies in liquidation proceedings. Of these, 4,783 cases are being conducted in various high courts. That is why India is at the bottom of 175 countries in terms of the time taken for bankruptcy proceedings — 10 years, which is supposed to be a conservative estimate.
The problem arises from a piece of benevolent legislation — the Sick Industrial Companies Act (SICA), 1985. Under SICA, all sick companies have to be compulsorily referred to the BIFR, whose brief is to expedite the revival of potentially viable units or closure of unviable ones.
The idea is to release idle investments for productive use. But the opposite has happened. Of the 1,400 cases pending in 2006, over 500 were filed before 2002.
Take the case of Coromandal Garments, which came to the BIFR in 1998. The operations of the firm were suspended since 1999. A draft revival scheme was circulated for discussion in 2001, but the parent company - Svadeshi Mills- couldn’t support it.
The operating agency failed to find a suitor. As of April, the fate of the firm hangs in balance. Much of the problem arises from the definition of sickness in SICA, says Kishore Soni, CEO of Soni Industrial Reconstruction Consultants (SIRCONS).. “When a company’s entire net worth is eroded, the chances of revival are slim,” he said.
Maybe that’s why, as of December 2004, only 8% of the cases before BIFR were actually revived. Another 5% were under revival. In contrast, winding up was recommended in 24% of the cases.
Not all businessmen who’ve referred their companies to BIFR are complaining about the delay. Section 22 of SICA gives companies complete immunity from proceedings under any other law, once it gets a registration number. This gives an easy way out to drive a company to loss or manipulate balance sheets to show erosion of net worth and escape their obligations.
It is to check this that once a case is referred to a bench, it can be subject to a special investigative audit to see if accounts have been fudged.
If they have been fudged, the case is dismissed. And 33% of the cases registered have been dismissed.
But the provision becomes meaningless, given the huge delays in proceedings. Cases filed in 2000 have been dismissed as non-maintainable only in 2006.
An attempt has been made to reform the whole bankruptcy and liquidation process. But that’s going through the same tortuous process that the BIFR subjects the companies under its purview to.
—To be concluded
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
)
){kind=small}
){kind=small}
)
)
)
)
)
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}