Chapter XIX: The Companies (Revival and Rehabilitation of Sick Companies) Rules, 2014

[YAGAY andSUN]

The Companies (Revival and Rehabilitation of Sick Companies) Rules, 2014 were introduced under the Companies Act, 2013 to provide a legal framework for the revival and rehabilitation of companies that have become financially distressed or have incurred substantial losses, resulting in their status as sick companies. These rules focus on facilitating the rescue and restructuring of sick companies, thereby preventing them from being unnecessarily closed or liquidated.

The goal of these rules is to promote the revival of viable companies that are unable to meet their financial obligations, ensuring that jobs, creditors’ interests, and businesses are preserved. At the same time, they aim to help non-viable companies exit the market in an orderly manner, while protecting the interests of stakeholders.

Key Provisions of the Companies (Revival and Rehabilitation of Sick Companies) Rules, 2014

1. Definition of Sick Company

A sick company is defined under these rules as a company:

• Whose net worth has been eroded (i.e., the company’s liabilities exceed its assets).
• The company’s financial performance indicates that it is unable to meet its financial obligations for a continuous period (usually defined as the financial losses of 50% or more of its net worth).

The term "sick" can also refer to companies facing extreme financial stress, such as mounting debts or insolvency risk.

2. Application for Revival and Rehabilitation

A company facing financial distress can apply for revival or rehabilitation by submitting an application to the Board for Industrial and Financial Reconstruction (BIFR) or the National Company Law Tribunal (NCLT), depending on the company’s situation. The application must be made in the prescribed form and must include:

• Audited financial statements of the company for the last few years to show the financial position.
• Details of liabilities owed by the company to creditors, including financial institutions, banks, and other stakeholders.
• Reasons for the company’s sickness, and an explanation of why the company believes that it can be revived.
• Proposal for rehabilitation, which can include measures such as debt restructuring, infusion of capital, management changes, or asset sales.

3. Constitution of a Revival and Rehabilitation Committee

Once an application for the revival and rehabilitation of a sick company is made, the Board for Industrial and Financial Reconstruction (BIFR) or the National Company Law Tribunal (NCLT) may establish a Revival and Rehabilitation Committee. This committee will be responsible for:

• Assessing the company’s financial condition and reviewing its business model.
• Evaluating the viability of the company’s revival.
• Developing a revival plan and deciding on restructuring measures.

The committee will consist of various stakeholders, including representatives from the company’s management, creditors, financial institutions, and any government-appointed representatives, depending on the situation.

4. Submission of the Revival Plan

The company, with the assistance of its board, management, and advisors, will need to prepare and submit a revival plan to the appointed committee. The plan must include:

• Financial restructuring, such as repayment schedules, conversion of debt into equity, or waiving of interest.
• Business strategy changes, such as scaling down operations, business diversification, or strategic partnerships.
• Cost-cutting measures, including workforce reduction or closure of unprofitable divisions.
• Capital infusion, either through new investment or other sources.
• Management restructuring, such as changes in the board or senior leadership to ensure effective decision-making.

The revival plan must be approved by the stakeholders, and creditors must also agree to the terms outlined in the plan.

5. Rehabilitation of Sick Companies

Upon the submission and review of the revival plan, the Board for Industrial and Financial Reconstruction (BIFR) or the National Company Law Tribunal (NCLT) may direct the company to implement the plan. The rehabilitation process generally includes:

• Debt Restructuring: Negotiation with creditors for a reduction in debt, rescheduling payments, or converting debt into equity.
• Asset Revaluation: Revaluing assets to determine their fair market value and ensuring that assets are properly accounted for.
• Management and Operational Changes: Changes to the company’s management structure, operational processes, and governance to improve efficiency and profitability.
• Investor and Stakeholder Engagement: Ensuring that all relevant stakeholders (including shareholders, creditors, employees, and government authorities) are kept informed of the company’s progress.

The National Company Law Tribunal (NCLT) may appoint a reconstruction administrator or monitoring agency to oversee the implementation of the plan.

6. Approval of the Revival Plan

The revival plan needs to be approved by:

• A majority of creditors, based on the value of their claims.
• A supermajority (i.e., a minimum percentage of approval) of the company’s shareholders.

The revival plan should also be approved by the NCLT or BIFR, which will ensure that the plan is in the best interest of all parties involved.

Once the revival plan is approved, the company will begin implementing the restructuring measures as outlined in the plan.

7. Monitoring of the Revival Process

The progress of the company’s revival is monitored periodically by the appointed committee or the NCLT. The monitoring process involves:

• Regular progress reports submitted by the company’s management and the appointed administrators.
• Review meetings with creditors, shareholders, and other stakeholders to assess the success of the rehabilitation measures.
• Ensuring that the company meets its financial and operational targets, as outlined in the approved revival plan.

If the company successfully rehabilitates itself and returns to financial health, it will continue operations and be removed from the “sick company” status.

8. Failure of Revival Plan and Closure of Company

If the revival plan fails or if it becomes clear that the company cannot be rehabilitated due to its inability to pay off debts or meet operational goals, the company may be liquidated under the insolvency and bankruptcy code or through the provisions of the Companies Act, 2013.

The failure to revive the company will result in the closure or winding-up of the company. If the company is liquidated, the proceeds from the sale of its assets will be used to pay off creditors.

9. Protection for Creditors and Employees

While the company undergoes the revival and rehabilitation process:

• Creditors are protected through debt restructuring agreements.
• Employees are protected, with provisions for retaining jobs where possible and ensuring their dues are paid.
• The Revival and Rehabilitation Committee must ensure that the interests of the creditors and employees are adequately considered when formulating the plan.

10. Penalties for Non-Compliance

If a company fails to comply with the provisions of the revival and rehabilitation process, including non-submission of the revival plan or failure to implement the plan as approved, the NCLT or BIFR may impose penalties. In extreme cases, it may lead to dissolution or liquidation of the company.

11. Conclusion

The Companies (Revival and Rehabilitation of Sick Companies) Rules, 2014 aim to provide a structured process for reviving financially distressed companies, giving them a chance to return to profitability through strategic restructuring and debt relief. These rules play a critical role in ensuring that companies with potential can recover and continue operations, which in turn helps protect the interests of various stakeholders like employees, creditors, and shareholders.

At the same time, the rules also provide for the orderly closure of companies that are no longer viable, thus preventing unnecessary resource wastage and ensuring that public and private resources are utilized efficiently. Overall, these rules promote the efficient and fair resolution of financial distress in companies, contributing to the overall stability of the corporate sector.