CHAPTER - 5

REVIVAL AND REHABILITATION

OF SICK UNITS : THE
COMPANIES ACT, 1956
 CHAPTER V
REVIVAL AND REHABILITATION OF SICK UNITS :
THE COMPANIES ACT, 1956

A BALAKRISHNA ERADI COMMITTEE

The Government of India set up a high Level Committee headed by

Justice V.B. Eradi, a retired Judge of the Supreme Court of India, during the year
1999. The Committee was asked to examine and make recommendations with
regard to.

• The desirability of changes in existing law relating to winding up of

companies so as to achieve more transparency and avoid delays in the final
liquidation of the companies.

• The rules of winding up and adjudication of insolvency of companies. The

manner in which the assets of the companies are brought to sale and the
proceeds are distributed efficiently and

• A self-contained note on winding up of companies having regard to the sick

Industrial Companies (Special Provisions) Act, 1985 and the Securities
Contracts (Regulations) Act, 1956 with a view to creating confidence in the
mind of investors, creditors, labour and other shareholders.

• The Committee completed its work and submitted its report to the Central
Government in the year 2000. The Committee recommended that the
Companies Act, 1956, be amended to include the provisions for setting up of a
National Tribunal which will have

• The Jurisdiction and power presently exercised by Company Law Board under
the Companies Act, 1956,

• The power to consider rehabilitation and revival of companies,

• The jurisdiction and power relating to winding up of companies presently

vested in the High Courts,

225
• While passing the order for winding up of a company, the Tribunal shall have
power to prescribe time limit for each step to be taken by the Liquidator in the
course of winding up process,

• The Tribunal shall also have power to direct the sale of business of the
company as a going concern or at its discretion to sell its asset in a piece-meal
manner, 3 0

• Provisions for Cross-Border Insolvency.

The Eradi Committee had laid a great stress on having an efficient system for
liquidation of companies ad disposal of their assets within a time bound
framework. Moreover, with a view to ensure expeditious disposal of cases, the
Committee recommended setting up of a unified authority in the nature of
National Company Law Tribunal which would handle case relating to sick
industries as well as winding up of companies. The Government desired to give
effect to the recommendation of the Eradi Committee by incorporating the
changes in the Companies Act vide the Companies (Second Amendment) Act,
2002.1

A National Company Law Tribunal is to be vested with the functions and

power with regard to rehabilitation and revival of sick industrial companies and
forming of a liquidation committee consisting of creditors of the company to
assist the Liquidator and by adopting the necessary principles enunciated under
International Monetary Fund’s propagated norms for ‘Orderly and Effective’
insolvency procedures.

' See Dr. S. D. Israni,’’Developments in Insolvency Law in India - A Story of Fits and
Starts,''Chartered Secretary, July 2008, p.900, K.Srinivasan, “Corporate Insolvency .
Unfolding Developments,” 39CLA, 2000, p.p 149-150 and Robin Majumdar,’’Corporate
Insolvency and Restructuring : In Search of Efficient and Effective Law,” Chartered
Secretary, july2008, p.907.
2 See U.K. Insolvency Act, 1986 Section 141.

226
(B) SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT,
2003

(i) GENERAL

The Sick Industrial Companies (Special Provisions) Repeal Act, 1985

belonged to an era of ‘protectionism’ which sought to keep alive the ‘sick
industrial companies’ by injecting public funds, and by providing various
concessions to the sick companies so as to make them viable in an attempt to save
the public funds. Many deficiencies were noted in the operation of the Act.*
3

• Slow pace of Board intervention

• Delay in winding up of sick companies

• Excessive protection of sick industries under section 22 of the Act providing

for automatic stay of all proceedings. In course of time, the Apex Court as
well as High Courts and Tribunals in the country also came across cases
where unfair advantage was sought to be taken of this provisions by certain
Industrial Companies.4

The Hon’ble Justice Shri B.P. Jeevan Reddy in the case of Coromandal
Pharmaceuticals5 Ltd. observed how out of tune the Act had become with the
economic policies being pursued in our country.

In the Finance Act, 2001, The Finance Minister, Mr. Yashwant Sinha
proclaimed that the Sick Industrial Companies (Special Provisions) Act, 1985
would be repealed. Looking to the provisions of the Act, and bearing in mind the
fact that the stress on the liberalization of economic policies commenced from
1991 in our nation, it is indeed surprising that it has taken such a long time for the
Central Government to discover the advantage of repealing the Act. The object of
the Act was undoubtedly laudable but it failed to provide for appropriate measures
against the person responsible, where it was found that sickness was caused by

J See the Statement of Objects and Reasons Appended to the Sick Industrial Companies(Special
Provisions) Bill, 2001.
4 See Real Value Appliance v Canara Bank (1998) 29 CLA 434(5c).
5 (1996) 87 comp cas 92 (AP).

227
factors other than circumstances beyond the control of management.6 7The
Government has came out with the sick industrial companies (special provisions)
Repeal Bill, 2001 to finally repeal the act. The Bill envisages the dissolution of
the board and the Appellate Authority. All the proceedings pending before the
board and the Appellate Authority prior to their dissolution shall also stand
abated. But Bill was not passed.

Again in the Winter Session of the Parliament in December, 2003 the Sick
Industrial Companies (Special Provisions) Repeal Bill, 2003 was passed and that
it became the Sick Industrial Companies (Special Provisions) Repeal Act, 2003”,
and it received the assent of the President of Indian on 1st January, 2004. It shall
came into force on such date as the Central Government may by notification in
the Official Gazatte, appoint. The SICA Repeal Act, 2003 repeals the Board for
Industrial and Financial Reconstruction and the Appellate Authority for Industrial
and Financial Reconstruction.

(ii) CONSEQUENCES

Section 3 of the Repealing Act provides that the Sick Industrial Companies
(Special Provisions) Act, 1985 is repealed and the Appellate Authority and the
Board stands dissolved. It follows that on the notification of the effective date .of
Repealing Act, this section shall immediately take effect and it will be the
National Company Law Tribunal which will deal with the matters relating to sick
industrial companies under the provisions of the new sections 424A to 424L of
the new Part VIA introduced in the Companies Act. Repealing Act provides the
effect of the repeal of the existing Act on the person holding office under the
# *7

Board or the Appellate Authority and matters relating to it.

Repealing Act provides that any appeal prefer to the Appellate Authority or any
reference made to Board or an enquiry pending before the Board or any
proceedings of the pending before the Appellate Authority and Board

6 Ayaz Bilawala,” Better Late Than Never - Sick Industrial Companies (Special Provisions)
Repeal Bill,2001,”45 CLA, 2001, p. 173. See also Mod Prasad Agrawal v Prdbandh
Mideshak Pradeshiya Industrial and Industrial corporation of U.P Ltd. (2009) 119
comp.cas. 578( All).
7 See The Sick Industrial Companies(Special Provisions)Repeal Act, 2003, section4(a).

228
 o

immediately before the commencement of the Act shall stand abated. It means
become void or to end legal action.9

The Repealing Act provides if a company had made a reference or an appeal

which was pending will stand abated, the Company may make a fresh reference to
the National Company Law Tribunal under Part VIA of the Company Act within
180 days from the commencement of the Repealing Act in accordance with the
provisions of the Companies Act.10

If the company has become a sick industrial company, according to the new
definition contained in the Companies Act, may make a reference under the
Companies Act within 180 days from the commencement of the Companies
(Second Amendment) Act, 2002 or within 160 days of final adoption of accounts
*

after such commencement whichever is earlier11 and no fee shall be paid.12

It may be noted in this connection that the definition of a sick industrial

company under the new provisions relating to sick industrial companies
introduced in the Companies Act are more stringent than the definition in the
Repealed Act. The Repealing Act goes without saying that since companies which
are “sick” according to the existing definition will necessarily be “sick” tinder the
new definition, it will be obligatory for them to make suCh a reference to National
Company Law. Therefore, it should be given that a company whose reference
stands abated, shall make a reference to the National Company Law tribunal in
1 ^
accordance with the provisions of Part VI of the Company Act.

Any scheme sanctioned or any scheme under implementation under Repealed

Law shall be deemed to be a scheme sanctioned or any scheme under
implementation under Section 424D of the Companies Act and shall be dealt with
accordance with the provisions contained under Part VIA of the Companies Act.14

8 Id. section 4(b).

9 See Black Law Dictionary, eight edition P.3.
10 Supra n.7 section 4(b)(1).
" See the Companies Act 1956, section 2(46AA).
12 Supra n.7 section 4b(ii).
lj B.J. Shah,’’Sick Industrial Companies (Special Provisions) Repeal Act,2003-A Critical
Examination”,Chartered Secretary, May 2004, p.615.
14 Supra n.6 Provisoin to Section 4(b).

229
 Any scheme sanctioned under the Repealed Act is saved and will be
implemented under new provisions. This is the strange provision. The criteria of
sickness under the new provisions are materially different from the criteria of
sickness under SICA and it is therefore not understood how a scheme which was
based on loss of 100% of networth can automatically be a scheme under the new
provisions where the criteria are loss of 50% of networth or default in repayment
of debt for three consecutive quarters. It will be appreciated that when there is a
loss of 100%of the networth the concessions and relief required to be granted by
the creditors and lenders will be much more than the concessions and reliefs
necessary in order to restore loss of 50% of the networth and creditors cannot be
expected to dole out same concessions where the restoration of health of a sick
company requires recoupment of only 50% of the networth as against 100% under
the SICA, it is therefore appears that while framing the provisions the material
difference in the definition of the Sick Industrial Companies in the SICA and in
the new provisions has been lost sight of it.15

(iii) MISCELLANEOUS

The Repealing Act further provide that any right or liability already acquired
under the Repealed Act will not be affected by the Repealing Act. The same is
applicable for sanctioned scheme under Repealing Act.16 There is apparently
i n
contradiction between Section 4(b) and Section 5(i) (e) of the Repealing Act.

The abatement of all pending cases before Board and Appellate Authority sent
a warning bell for sick units where no hearing had taken place before the Board or
Appellate Authority. All such companies are worried as to whether the legal
protection is available under Section 22 of Repealed Act would continue to be
available or not. Besides, The Companies, which were already on the verge of
sickness or whose entire networth was eroded, were awaiting filing of reference
were also worried . It is also important to note that the Repealing Act yet has not
been made effective.

15 Supra n.13.
16 Supra n.6 section 5.
17 Supra n.13. p.616.
18 Delep Goswami,”Fate of Sick Companies after Passing of Sica Repeal Act, 2003,”Chartered
Secretary, mar 2004, p.366.See also the General Clause Act, 1987, section 6 and Aribant
Tuleshwar Sharma v Jrengban Yaima Singh AIR 1965 Mani 39,43.

230
C THE COMPANIES (SECOND AMENDMENT) ACT, 2002

The Companies (Second Amendment) Act, 2002 introduced in Part VIA in the
Companies Act, 1956. This Part consist of 8 Sections from Sections 424A to
424L. These sections provide for a new mode of Tackling Sickness

(i) NATIONAL COMPANY LAW TRIBUNAL

The Amendment Acts provides setting up of National Company Law tribunal

to deal with rehabilitation and revival of sick industrial companies and vest with
powers to discharge the functions conferred under the Companies Act, 1956 or
under any other law.19 The National Company Law Tribunal and its Appellate
Tribunal shall consolidate the powers and functions of the Board for Industrial
and Financial Reconstruction. The National Company Law Tribunal shall have its
principal bench at Delhi and benches throughout India. It shall consist of a
President and judicial and technical members Up to 62 to be appointed by the
Central Government. There will be a chairman and not more than two members in
each National Company Law Tribunal. The President of the National Company
Law Tribunal shall be a qualified judge of a High Court and appointed by the
Central Government in consultation with the Chief Justice of India and his
nominee. There will be atleast ten Special Benches, each consisting of not more
than three members, one of whom shall be a Judicial Member and other two
members to be appointed for disposal of any case relating to rehabilitation,
restructuring or winding up of the companies.

(ii) PROCEDURE FOR REVIVAL

(a) Reference

When an industrial company becomes sick, the board of directors of such

company shall make an application to the National Company Law Tribunal in the
prescribed form along with a certificate from an auditor , panel Of auditors

19 See T.N Pandey” Reincarnation of Sica in the Form of Sections 424A to 42L in the Companies
Act 1956,"3 Comp LJ, 2003, pp.31-39 and R.Santhanam,” New Scheme ofTreatment of Sick
Industrial Companies,’’Comp LJ, 2003, pp 1-8.
20 See the Companies Act 1956, sections 10FB-10FB.
21 Id. section 424 A. See also Supra chapter IV, nn, 134-191.

231
prepared by the National Company Law Tribunal indicating the reasons for the
erosion of its net worth or default in repayment its debts.

(b) Inquiry

The National Company Law Tribunal may make an inquiry into the affairs of
the company leading to sickness and, if deemed fit, may appoint one or more
competent persons as directors or special directors on the board of such a Sick
Industrial Company for safeguarding the business interests of the company"

(c) Scheme

In case of a rehabilitation of a sick company, the scheme may provide for

financial assistance by way of loans, advances or guarantees or reliefs or
concessions or sacrifices from the Central Government, state government, banks
and financial institutions. All affected parties in a sick company will be bound by
the orders of the National Company Law Tribunal and in case of non-availability
of a workable proposal for revival or rehabilitation of a sick company, the
National Company Law Tribunal can decide the matter on merits including
introduction of its own scheme.

(iii)WINDING UP

The National Company Law Tribunal may order winding up of sick company
in cases where it is unlikely to become financially viable in future. Financial
unviability means that the company is unable to make its net worth exceed the
accumulated losses within a reasonable time while meeting all its financial
obligations. In such cases, it is just and equitable that the unviable sick companies
should be wound up. The National Company Law Tribunal for winding up of sick
companies, can appoint official liquidators, a panel of professional firms or
chartered accountants, advocates, company secretaries, costs and works
accountants or firms having combination of these is to be prepared by the
National Company Law Tribunal. Further, the official liquidator may, with the
sanction of the National Company Law Tribunal, appoint one or more chartered

22 Id. section 424 B. See also Supra Chapter iv, nn. 192-253.
2j Id. sections 424 C to 424E. See also Supra Chapter iv, nn. 254-307.

232
accountants, company secretaries, cost accountants and advocates to assist him in
the performance of his duties.24

(iv) APPEAL

Any person aggrieved by an order of the National Company Law Tribunal can
prefer an appeal to the Appellate Tribunal, which will pass an order after giving
an opportunity of being heard to both the parties. The appellant can appear either
in person or authorize one or more advocate, chartered accountant, company
secretary and cost accountant in practice to present his case. The Appellate
Authority have same authority in respect of contempt of itself as the High Court
has. Any person aggrieved by any decision of Appellate but Tribunal may file an
appeal to the Supreme Court within 60 days from the date of communication of
'yc
the decision of the Appellate Tribunal.

(V) MISCELLANEOUS

(a) Powers of Tribunal

The Official Liquidator shall make security arrangements to protect the

property of the company taken into his custody and to make out an inventory of
the assets in consultation with secured creditors after giving them notice. The
liquidator can also appoint valuer, chartered surveyors or chartered accountants to
assess the value of the company’s assets within fifteen days after taking into
custody of property, assets or actionable claims subject to such terms and
conditions may be specified by the National Company Law Tribunal. The
Tribunal may direct the company not to dispose of the assets of the sick company
except with the prior approval of the Tribunal during the period of inquiry or
during the preparation or consideration of the schemes sO that the interest of the
creditors, workers, etc., is not prejudiced.27 It is also empowered to call for
periodic information from the company in regard to the steps taken by it to make

24 Id. sections 424 G and -448 See also Neeraj Garg,” Insolvency Practitioner, creating the Right
Structure,” Chartered Secretary, July 2008, pp.888-889. See also Supra Chapter iv, nn. 308-
321
25 Id. Section 10 FQ-FG. See also Supra Chapter iv, nn. 341-353.
26 Id. section 424 -I.
27 Id. section 424-1.

233
the net worth positive or to make repayment of the debts and the company shall
be oblige to furnish the information 28

(b) Misfeasance Proceedings

The Tribunal is empowered to initiate proceedings for misfeasance where it

appears to the Tribunal that promoters or company management had misapplied
or retained or money or property of the sick company or has been guilty of any
misfeasance, malfeasance or non-feasance or breach of trust, the Tribunal would
direct him to repay or restore the money or property with or without interest as it
90
deems fit.

(c) Penalty

The Act provides the person who violates the provisions of the Act or any
scheme or any order of the Tribunal or the Appellate Tribunal and attempts to
tamper the records of reference or appeal shall be punishable with simple
imprisonment which may extends to three years or shall be liable to fine not
exceeding Rs. 10 lakhs. The court shall not take cognizance of such offence
except on a complaint in writing by an authorized officer.

(d) Rabilitation and Revival Fund

The Cess on companies will be levied for purpose of Rehabilitation or Revival
of Sick Industrial Companies equal to 0.005% to 0.1% on the value of annual turn
over of every company or its annual gross receipt whichever is more. The cess is
to be paid within three months from the close of every financial year and
company is to furnish the details of its turnover and gross receipts with payment
of cess.31

(1) Cess credited to consolidates Funds of India

The Collected Cess is to be credited to Consolidated Fund of India as Cess is a

tax. Then it will be transferred to “Rehabilitation and Revival Fund” on the basis
”39
of appropriation approved by Parliament.

28 Id. section 424J.

29 Id. section 424K. See also Supra Chapter iv, nn. 420-448.
30 Id. section 424L.
jl Id. section 421 A.
32 Id. section 44IB and 441C.

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(2) Purposes

The Fund will be under the control of National Company Tribunal. Tribunal
has to apply it for making interim payment of workmen’s due, payment of
workmen’s due to the workmen of the Sick Industrial Company, Protection of
assets of Sick Industrial Company. The Central Government or Tribunal may
require any company furnish information for the purposes of revival or protection
of assets of sick unit.34

(3) Penalty

If the cess is not paid it shall be deemed to be in arrears and can be recovered
by Tribunal, Tribunal, after making enquiry, may impose on the Company penalty
not exceeding ten times the amount in arrears.35

(4) Recovery

The amount applied shall be recovered from the company after its revival or
rehabilitation or out of sale proceeds of its assets after discharging the statutory
liabilities and payment of due to creditors.

The amendment Act of 2002 provides that the period of office of each
member was only three years. This was directly against the decision of the
3 *f

Supreme Court in Sampath Kumar v Union of India which was held that even
the period of five years was not adequate. The Act provides for lien of members
which again destroys the independence of persons who are appointed to discharge
their judicial duties. The tribunal contemplated a bench consisting of one judicial
and one technical member. The qualification prescribed for a technical member is
shocking.

It is clear that provisions are tailor made to recruit retired civil servants from
TO

any branch of bureaucracy. There is no provision for a proper method of

selection.39

Id. section44ID.
34 Id. section 441E.
35 Id. section 441F.
36 Id. section 441G.
37 AIR 1987 SC 386.
jS Arvind P Datar, “ Company Law”, Annual Survey of Indian Law, 2004, p.66.
39 Id. at p.67.

235
The Auditor Report or Certificate certifying the reasons whereby the company
became a sick company may be a welcome suggestion. It should be
acknowledged that the company may become a sick company due to a complexity
or reasons and that the auditors may not be the right persons to certify the reasons
for the company becoming sick company. It would have been preferable if the
provisions relating to Auditor’s Certificate had been confined to the auditors
certifying that there has been a loss of 50% of networth or that there has been a
default in repayment of debt for three consecutive quarters.40

Section 22 of SICA provides that no new proceedings can be instituted against

a sick industrial company and proceedings already institute cannot be proceeded
with further once a company’s reference to the board is registered. This does not
find a place in the new provisions. There will, therefore, be no automatic
protection to the company and its assets under the new provisions. It is difficult to
imagine consequences of the deletion of the section 22 of the SCA but it will be
of course be open to an operating agency and others to provide in the
rehabilitation scheme that the existing proceedings may be stayed and no new
proceedings can be instituted without the permission of NCLT once a company
becomes a sick industry company under the new provisions. This will be pursuant
to provisions of 424(2) (e) of the Companies Act.41

These provisions regarding rehabilitation fund appears to be unconstitutional

as they are Confiscatory in nature. They are punitive in their present form. There
was one more instance of some loose thinking and careless drafting etc. For
example, the cess is to be paid by every company. Every company will include
sick companies which themselves are in need of funds.42 This appears to be a case
of Robbing Paul to Pay Peter.43

40 B.J. Shah,” New Provisions Relating to Sick Companies Radial Departure from Existing
Provisions”, Chartered Secretary, May 2003, p.576.
4'IbIti
42 B.J. Shah,” Companies (Amendment) Bill, 2001-Proposed Levy of cess for rehabelitation of
Sick units,” 47 CLA, 2002, pp. 161-163.
4'’ P.S K a c i c k e r, ’ SICK In dustrial Companies,”(2004), p.1.194.

236
D. THE SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS)
ACT,1985 VIS A VIS THE COMPANIES ACT, 1956

The many provisions of SICA has been incorporated in Chapter VIA of the
Companies Act, 1956 by the Companies (Second Amendment) Act, 2002 in
considerably diluted form to plug the Loophotes in SICA. Let us see how it is
done.44

(i) DECLARATION REGARDING THE PRINCIPLES OF COMMON GOOD-

AND NON CONCENTRATION OF WEALTH

SICA provides that Act to give effect to policy towards securing the principle
specified in Article 39(b) and 39(c) of the Constitution of India. This was made to
avoid possible challenge to constitutional validity of SICA45. There is no similar
declaration under the Company Law Provisions. The non inclusion of similar
declaration under the Companies Act does not provide insulation from challenges
under article 14 & 19 of the Constitution in view of article 31C of the
Constitution.

(ii) NET WORTH

The expression net worth is defined in SICA46 and in the Companies Act.47
The definition of “Net Worth” in SICA is although retained but the words ‘after
deduction provisions or expenses as may be prescribed’ have been added. Earlier
companies were not deducting provisions and expenses for computing net worth.
Now this loophole may be plugged. If the expenses are shown in the balance sheet
as assets and provisions are deducted, the net Worth, gets considerably reduced,
and hence sick industrial company can be detected much sootier.

(iii) OPERATING AGENCY

The definition of Operating Agency was given in SICA and in the

Companies Act.49 The definition of ‘Operating Agency’ in the Companies Act has
been widened to include ‘any group of experts consisting of persons having

44 Pumima Mishra, “The provisions of SICA & Companies Act,” The Chartered Accountant, Mar
2004, pp.993-999.
45 The Sick Industrial Companies (Special Provisions) Act, 1985, Section 2.
46 See Id. Section 3 (1) (ga).
47 The Companies Act, 1956, Section 2 (29A).
48 Supra n.45 Section 3(1) (i).
49 Supra n.47 Section 2 (31AA).

237
special knowledge in banking and industry in which the sick industrial company
is engaged’. This will enable the National Company Law Tribunal to provide an
effective revival scheme drafted by the experts in banking and industry to assist
the sick company in rehabilitation.

(iv) SICK INDUSTRIAL UNIT

‘Sick Industrial Company’ is defined in SICA50 and the Companies Act51. In

the Companies Act the requirement is accumulated loss exceeding 50% of the
average Net Worth during last four years or failing to repay its debts within any
three consecutive quarters to the creditors. Under the Companies Act five years
existence is not required, it means holiday period of 5 years has been deleted.
(v) REFERENCE
The reference to Board is made under SICA52 and the Companies Act53. In
Companies Act the company is required to submit a scheme of revival and
rehabilitation and to furnish a certificate from auditor giving reasons for sickness
at time of making reference to the Tribunal. Thus the responsibility for
preparation of revival and rehabilitation is casted on the company making the
reference to Tribunal. Auditor’s certificate adds to the authencity of such
reference.

(vi) SICK UNIT

The Companies Act provides the Tribunal is to decide whether the Company
has become sick, even before making enquiry54. This is similar to admission of
petition. Reference may be rejected at that stage itself. In SICA such order could
be passed only after making enquiry.35

(vii) ENQUIRY PERIOD:

In SICA the Board has to pass the final orders within 60 days from
commencement of enquiry56. In the Companies Act the operating agency, shall
submit its report within 21 days which may be extended upto 40 days. The

50 Supra n.45 Section 3(1) (o).

51 Supra n.47 Section 2 (46 AA).
52 Supra n.45 Section 15.
53 Supra n.47 Section 424A.
54 See Supra n.47 Companies Act, 1956, Section 424(A)(5).
55 See Supra n.45 Section 16(1).
56 Id. section 16(3).

238
Tribunal shall conclude enquiry within 60 days from commencement of enquiry
which may be extended up to 90 days for reasons to be recorded57.

(viii) SCHEME PERIOD

In the Companies Act, the Operating Agency to compare the scheme for
revival and rehabilitation with specific regards to the guidelines of RBI within 60
days which may be extended up to 90 days . In SICA 90 days are provided to
prepare a scheme59.

(ix) REPORT BY SPECIAL DIRECTOR

In the Companies Act, Special Director is required to submit report to the

Tribunal within 60 days. He will have powers of director of the company60. There
is no such provision in SICA.

(x) FILING OF SANCTIONED SCHEME WITH REGISTRAR

In the Companies Act the copy of the sanctioned Scheme to be filed with the
Registrar61.There is no such provision in SICA.

(xi) SCHEME BY CREDITORS

In the Companies Act, scheme may also be preprared by the creditors of the
sick company, if agreed to be by 75% creditors .There is no such provision in
SICA62.

(xii) WINDING UP RECOMMENDATIONS

In SICA , board was required to record and forward its opinion for winding up
/-"j

of Sick Industrial Company to the High Court . There is no such requirement in

the Companies Act as Tribunal can itself appoint any officer of operating Agency
as liquidator64.

57 Supra n.39 sections 424 B(3) and 424 B(4).

58 Supra n.39 section 424 D.
59 Supra 40 section 18.
60 Supra 39 section 424 B (6).
61 Id. section 424 D (9).
62 Id. sections 424 D (ii) and 424 D (12).
6j Supra n.40 section 20.
64 Supra n.39 section 424 G (1) and (2).

239
(xiii) WINDING UP PERIODS

The Companies Act provides that winding up should be completed within one
year from order of winding up65. There is no such provision in SICA.

(xiv) SUSPENSION OF LEGAL PROCEEDINGS

The SICA provides complete immunity from legal suits, recovery proceedings
and winding up petitions, during the inquiry and implementation of schemes66.
There is no such provision in the Companies Act.

(xv) POTENTIALLY SICK UNIT

SICA provides for potentially Sick Industrial Companies . There is no such

provision in the companies act.

(xvi) OVERRIDING IMPACT

The SICA provides for Overriding impact over all other laws except, FEMA
and Urban land (Ceiling and Regulation) Act68. There is no such provision in the
Companies Act. Thus, various legal provisions under different enactments have to
be complied with to make the sanctioned scheme effective.

(xvii) PENALTY

The Companies Act provides for penalty of imprisonment upto three years
and fine upto Rs. 10 lacs for violation of orders of Tribunal, making false
statements or giving false evidence or attempt to tamper records of reference or
appeal69. SICA also contain parallel provisions but the Companies Act
incorporated two changes. These are Limit of fine fixed upto Rs. 10 lacs and
tampering records of reference or appeal recognized as a punishable offence .

65 Id. section 424 G (4).

66 Supra n.40 section 22.
67 Id. sections 23,23A and 23 B.
68 Id. section 32.
69 Supra n.39 section 424 L.
70 Supra n.40 section 33.

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(xviii) REHABILITATION FUND

The Companies Act provide for levying of cess at rate of not less than 0.005%
and not more than 0.1% of annual turnover or of gross receipt whichever is more
for the revival and rehabilitation of Sick Units71. There is no such provisions in
SICA.

E. RECENT DEVELOPMENTS

(i) JUSTICE IRANI COMMITTEE:

The Central Government thought of total overhauling Companies Act by

replacing it with a total new simplified enactment. Accordingly, the Government
has appointed a committee under the chairmanship of Dr. Jamshed J. Irani on 2nd
Dec. 2004 to review the Companies Act, 1956 and recommend measures to speed
up incorporation and liquidation of companies. This Expert Committee in his
Report dated 31st May 2005 made the following observations72.

• The Indian system provides neither an opportunity for speedy and effective
rehabilitation nor Effective Exit, The Process for rehabilitation regulated by SICA
is amenable to delays and does not provide a balanced or effective framework for
all the stakeholders. The process of liquidation and winding up is costly,
inordinately lengthy and results in almost complete erosion of asset value.

• The Companies (Second Amendment) Act, 2002 had brought about

significant changes in provisions dealing with Rehabilitation, Winding up or
Liquidations of Companies and had also proposed that an institutional structure
for the purpose to set up in the form establishment of Tribunal or Appellate
Tribunal would provide a major initiative for the reform of the insolvency system
in the country.

71 Supra n.39 section 44 A - 441G.

72 Dr. K. S. Ravi Chandran,” Insolvency Practice. Emerging Issues and Opportunities*” Chartered
Secretary, july 2008, p.903. See also Dr. IsraniDevelopments in Insolvency Law in India-
A Story of Fits and Starts Chartered Secretary , july 2008 , p.901, Lalit Bhasin, “
Corporate Insolvency ,” Chartered Secretary , july 2008 , p.894 and Naresh Kumar
Corporate Insolvency and Restructing - Legal and Regulatory Framework Chartered
Secretary, july 2008, p.918.

241
• Tribunal in consultation with the secured creditors, should appoint qualified
Administrators, to administer the estate in the interest of all stakeholders. The
Administrators and Liquidators should be chosen from a panel of professionals
with appropriate experience and knowledge of insolvency practice. The panel
should be of individual advocates, accountants, company secretaries, cost and
works accountants and other experts rather than the firms so that the
independence and accountability of individuals may be determined.

• Law should encourage and recognize the concept of Insolvency Practitioners,

Administrators, Liquidators, Turnaround Specialists or Valuers. Currently, the
Law does not support effective participation of professionals and experts in the
Insolvency process. Insolvency laws in India should provide for rules of
jurisdiction, recognition of Foreign judgments, co-operation and assistance among
courts in different countries and choice of law. '

• Many countries have already adopted the UNClTRAL Model Law on Cross
Border Insolvency with or without modifications. Adoption of the Model Law by
India may also be considered with suitable modifications keeping pace with its
adoption by countries having significant trade or investment linkages with India .

(ii) THE COMPANIES BILL, 2009

The Companies Bill 2008 had lapsed with the dissolution of 14th Lok Sabha.
Therefore, the Companies Bill 2009 is introduced in Parliament. The provisions
relating to Revival and Rehabilitation of Sick Companies have been completely
modified and refined in the Companies Bill, 2009 on lines of the Global
Bankruptcy laws with suitable modifications as there was an urgent need to
change laws relating to Revival of sick companies in India. Chapter XIX of
Companies Bill, 2009 contains provisions relating to Revival and Rehabilitation
of Sick Companies74. The new provisions are discussed below:

7j See Argyya Chattaraj, “Cross Border Corporate Insolvency : A Private International law
Approach,” Journal of Symbiosis law College, Sept, 2005, pp. 104-113, T.K.A.
Padmanabhan, “Cross-Border issues in Corporate Insolvency : An Indian Perspective”,
Chartered Secretary, July, 2008, pp. 935-936 and Shramistha Chakrabarti, “The Chaos in
Cross Border Corporate Insolvencies”, -1 CLC, 2007, pp 43-50.
74 See Pavan Kumar Vinay ,’’Revival & Rehabilitation of Sick Companies - A Paradigm Shift,”
Chartered Secretary, Sept 2009, pp. 1218 - 1225. See also Dr. S. D. Israni,” Companies Bill,
2009 - Needs Some Revamping ,” Chartered Secretary , Sept 2009, pp.1226 - 1229,D. K.
Prahlada Rao, “ What is New in the Companies Bill, 2009,” Chartered Secretary, Sept 2009,

242
• Sickness has been linked with cash flows and the rights of majority Secured
Creditors are being protected under these provisions. If any Company has failed
to pay or secure or compound their debt within 30 days of the notice to company,
they may file an application to Tribunal for determination of company as Sick
* .1 .

Company . l -‘

• Where the Tribunal determines the Company as Sick and the Company has
not prepare draft scheme for its Revival and Rehabilitation, the Tribunal may
direct the Interim Administrator to take over the management of the Company.
Interim Administrator is also appointed to convene meeting of creditors77.

• A committee of Creditors shall be appointed by the Interim Administrator

which shall not exceed seven members to represent as far as possible each class of
Creditors to that committee .

• In case the Tribunal is satisfied that the sick company may be revived, it may
appoint a Company Administrator79 to prepare a scheme of revival and
QA

rehabilitation or take over the management of the company .

• In the course of scrutiny or implementation of scheme if it appears to Tribunal

that fund have been misapplied or any of the Promoters or Management person is
guilty of misfeasance, Tribunal may direct any past or present director or office to
restore that money or property with or without interest .

• A Rehabilitation and Insolvency fund is to be set up for the purpose of

Rehabilitation, Revival and Liquidation of Sick Company. However it is not
mandatory for any Company to transfer such amount .

pp.1214-1217, Arvind P. Datar,” Companies Law,” Annual Survey of Indian Law, (2005)
p.51 and Lalit Bhasin,” Corporate Insolvency,” Chartered Secretary, July 2008, p.895.
75 See The Companies Bill, 2009, Clause 229(1).
76 The person shall be appointed by Tribunal from a panel maintained by the Central Govt.
consisting of CS/CA/CWA other professionals as may be notified by Central Govt.
11 Supra n.75 Clause 231 (l)(b).
78 Id. Clause 232(1).
79 See Supra n.76.
80 Supra n.68 Clause 237.
81 Id. Clause 241.
82 Id. Clause 244.

243
F. PRESENT STATUS ANS SCENARIO

The setting up of the National Company Law Tribunal suffered a setback

when the Madras High Court struck down the provisions relating to the
appointment of its members as unconstitutional. The Madras High Court declared
that the provisions of Part IB and IC of the Companies Act, 1956 introduced by
the Companies (Second Amendment) Act, 2002 are in breach of basic
constitutional scheme of separation of powers and independence of Judicial
function. The court called for an early amendment of the same to remove the
defects pointed out and held that until these defects are removed, it would be
unconstitutional to constitute a Tribunal and Appellate Tribunal to exercise the
jurisdiction now exercised by the High Courts or the Company Law Board.

The Union of India has filed an appeal against the order of the Madras High
Court in the Supreme Court. The Supreme Court in Union of India . R. Gandht4
referred the appeal to the Constitutional Bench as it involved question of law with
respect to the validity of “wholesale transfer” of Judicial functions to Tribunal.
The Apex court observed that:

“The challenges in these appeal is to the validity of the provisions of

Companies Act, 1956 as amended by the Companies (Second Amendment) Act,
2002, which provides for setting up of National Company Law Tribunal and
National Company Law Appellate Tribunal. Barring the jurisdiction exercised
under Articles 226 and 227, almost all jurisdictions, hitherto exercised by the
High Courts in regard to the company matters would be transferred and exercised
by the proposed Tribunal and Appellate Tribunal.

Law relating to the legislative competence to establish Tribunals has been

enunciated in several judgments of this court, including L. Chandra Kumar v
Union of India and Ors85, Union of India & Anr. v Delhi High Court Bar

8j See R. Gandhi, President, Madras Bar Association v union of India (2004) 2 Comp LJ 274
(Mad), R. Gandhi v union of India (2004) 120 Comp Cas 510 (Mad).
84 (2007) 137 Comp Cas 689 (SC) ;(2007) 4 SCC 341 ; (2007) 3 Comp LJ 1(SC) ; (2007) 76 SCL
350 (SC).
85 (1997) 3 SCC 261.

244
Association & Ors.86, State of Karnataka v Vishwabharathi House Building
Cooperative Society <6 Ors . It has been held that under entries 77, 78, 95 of List
I. Entry 65 of List II and Entry 1 IA of List III, the Parliament and State
Legislatures possess legislative competence to effect changes in the original
jurisdiction of the Supreme Court and the High Court.

However, in none of the decisions rendered so far the question as to what

extent such powers of High Court can be transferred to Tribunals, excepting
judicial review under Articles 226/227 has not been considered. There is as yet no
demarcating line to show that, except for powers exercised under Article 226 and
277, the Parliament has the legislative competence to vest intrinsic judicial
functions, traditionally performed by Courts in any Tribunal or Authority, outside
the judiciary. The question to be determined is whether such ‘wholesale transfer
of powers’ as contemplated by the Companies (Second Amendment) Act, 2002
would offend the constitutional scheme of separation of powers and independence
of judiciary, so as to aggrandize one branch over the other.

Since the issues raised in the appeals are of seminal importance and are likely
to have serious impact on the very structure and independence of the judicial
system, we are of the view that the issue with regard to the constitution of the
Tribunals and the areas of their jurisdiction needs to be given a fresh look arid
therefore, the matter deserves to be heard by a Constitution Bench”.

The matter is referred to the Contitutional Bench consisting of Chief Justice

K.G. Bala Krishnan, and members Mr. Raveendrari, Mr. D.K. Jain, P. Sathasivam,
and Mr. J.M. Panchal and the bench held that parliament’s power to create
Tribunals cannot be disputed or doubted and legislation can be challenged for
violation of those principles which enshrine principles of separation of power,
QO

rule of Law and Independence of judiciary .

86 (2002) 4 SCC 275; (2002) 110 Comp Cas 141 (SC).

87 (2003) 2 SCC 412; (2003) 113 Comp Cas 536 (SC).
88 See Union of India v R Gandhi, President, Madras Bar Association JT 2010 (5) SC 553.

245
G. SICK UNITS AND OTHERS LAWS

(I) THE SECURITIZATION AND RECONSTRUCTION OF FINANCIAL

ASSETS AND ENFORCEMENT OF SECURITY INTEREST ACT, 2002.

(a) General

Banks and Financial Institutions are the custodian of public money. There is a
need to rotate money for the public good. One of the major problems faced by
Banks and Financial Institutions is that of bad debts, Non Performing Assets.89
Bad debts is a loss to the Economy, therefore various committies were set up by
Government to study the problems of banking industry and to suggest
improvements.90 These Committees are :

• Narsimhami Committee,91 was formed in 1991. The Committee submitted its

report in November, 1991 and was tabled before Parliament On
17-12-1991. The committee recommended that an asset should be considered
non-performing if interest on such asset remaining past due for a period
exceeding 180 days, health code system should be introduced. Asset should be
classified as standard, sub-standard, doubtful and loss assets and Asset
Reconstruction Fund should be established, which would take over from
banks and financial institutions bad and doubtful debts at a discount.

• Andhyarujina Committee on Legal Reforms,92 was set up by Government of

India in February, 1999 to formulate specific proposals to give effect to the

89 Non-performing Assets means an assets as well as a leased asset become non-performing when
it ceases to generate income for bank. The Securitization and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002, Section 2(1 )(o).
90 The statement of objects and reasons appended to Securitization and Reconstruction of
Financial Assets and Enforcement of Security Interest Bill, 2002. Reserve Bank of India also
takes various policy decisions to control the problem of NPAs a one time settlement scheme
for settlement of bad debts for small borrowers was introduced in 1999. See mid-term
monetary and credit policy announced on 22-10-2001 by Dr. Bimal Jalan, Govemer RBI, A
corporate Debt Restructing (CDR) scheme announced by RBI on 2001, which was replaced
by a new scheme vide circular No. BP BC 68/21-04-132/2002 dated 5-2-2003 and the
Monetaiy and Credit Policy for 2002-03 announced by Dr. Bimal Jalan, Govemer, RBI on 29-
4-2002.
91 This was a nine member committee under Sh. M.Narasimham, former Governor of India see the
second Narismham Committee Report submitted in April 1998. See also Dr. S.D. Israni,
“Development in Insolvency Law in India - A story of Fits and Starts,” Chartered Secretary,
July 2008, p.900.
92 This was a ten member committee chaired by Sh. T.R. and Hyarujina, former Solicitor General
of India.

246
 suggestions made by Narasimhan Committee. The Committee submitted its
report on ‘Legal Reforms in Banking Sector’ in May, 2000. The Committee
recommended that Banks should have powers for taking possession and sale
of securities without intervention of Court in respect of mortgaged properties
and securitization as a product provides many benefits to the financial system.
The Committee prepared a draft Securitization Bill.

• Government prepared a Bill and without waiting for Parliament approval, on

Ordinance titled ‘Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Ordinance, 2002’ was promulgated on 21-6-
2002.94 The Ordinance could not be converted into an Act in the monsoon
session of Parliament in August 2002. Hence, fresh Ordinance was issued in
August 2002, replacing the earlier ordinance.95 Subsequently, the Ordinance
was converted into an Act in winter session of Parliament in December,
2002.96

(b) Nature and Scope

The Act would enable banks and financial institutions to realize long term
assets, manage problem of liquidity, asset liability mismatches and improve
recovery by exercising powers to take possession of securities, sell them and
reduce non-performing assets by adopting measures for recovery or
reconstruction.97

Securitization Act provides for the remedial measures to a particular class of

secured creditors i.e. banks and financial institutions towards the secured assets.
Thus, the banks and financial institutions may enforce any security interest
created in their favour without the intervention of the court in Tribunal. The scope

93 The Government combined the draft prepared by a working group under the Chairmanship of
Shri M.R. Umraji, Executive Director,. RBI and Andhyarujina Committee and prepared a
combined Bill.
94 See Gazatte of India, Extra, Part II, Sec 1, p.l, dated 21-6-2002.
95 See Gazatte of India, Extra, Part II, Sec. 1, p.l, dated 21-8-2002.
% See Gazatte of India, Extra, Part II, Sec.l, dated 18-12-2002. the Act takes effect from 21-6-
2002, i.e., the date of the first ordinance itself.
97 See the statement of Objects and Reasons appended to Securitization Bill - See also Apex
Electricals Ltd. v ICICI Bank Ltd. (2003) 117 Comp cas412 (Guj.).

247
of the remedy is limited only to the secured assets and security interest created in
the property and does not extend to the personal assets but under the normal law
remedy can even extended to the personal assets of the debtor.

(c) Procedural Law

The Act like the code of Civil Procedure, 1908 is a procedural law. The only
difference is that in the latter procedures are provided through the Court while in
the former procedures can be directly effected by the secured creditors for
realization of enforcement of security interest in the secured assets and the action
or measures taken by the secured creditors are made subject to the right of the
aggrieved party to prefer appeal before Debt Recovery Tribunal and the second
no
appeal before the Appellate Tribunal.

(d) Retroactive

in Apex Electrical Ltd. v ICICI Bank Ltd.,99 the court held that “In my view,
the language used by the Legislature in the Act is more than sufficient to show the
intention of the Legislature to include the transactions of loan already entered into
on the date when the Act came into force and, therefore, merely because in sub­
section (2) of section 13 there is a use of words “makes any default”, it cannot be
read that the Act would not apply to loan transactions and security interest
credited prior to the Act coming , into force. If such an interpretation is given it
would frustrate the very intention of the Legislature and not only that, but it
would also result into nullifying the effect and operation of number of provisions
of the Act.

Even otherwise also, since the Act is a procedural remedial measure provided
to a certain class of secured creditors for enforcement of security interest, it
cannot be read as having effect only qua the actions and the transactions of loan
after the Act came into force or a default or non-performing assets after the Act
came into force. As such the Act intends to cover all transactions of loan already
entered into subject to the provisions of within the period of limitation and the

98
Apex Electrical Ltd. v ICICI Bank Ltd. (2002) 39 SCL 897 : (2003) 117 Comp cas412 (Guj.)
99
Ibid.

248
defaults in making repayment and the debts already classified as non-performing
assets and such future contingencies too.”

In the case certain petitioners had pleaded that the Act could not be made
applicable retrospectively. They contended that the Act ought to be made
applicable to defaults made after the date of coming into force of the Act. They
placed reliance on the words “makes any default” used in section 13(2).

(e) Constitutional Validity

In Mardia Chemicals Ltd. v VOI & Ors etc.,100 the validity of the
Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest Act 2002 was challenged. In this case a notice was issued to the
petitioner - Mardia Chemicals Ltd. by the Industrial Development Bank of India
under section 13 of the Sarfasi Ordinance, requiring it to pay the amount of
arrears indicated in the notice within 60 days, failing which the IDBI as a secured
creditor would be entitled to enforce the security interest without intervention of
the court or tribunal, taking recourse to all or any of the measures contained in
sub-section (4) of section 13 namely, by taking over possession or management of
secured assets. The petitioner was also required not to transfer by way of sale,
lease or otherwise any of the secured assets. Similar notices were issued by other
financial institutions and banks under the provisions of section 13 of the
Ordinance Act to different parties who filed petitions in different High Courts.
The Court held : “...We find that the requirement of deposit of 75% of amount
claimed before entertaining an appeal (petition) under section 17 of the Act is an
oppressive, onerous and arbitrary condition against all the canons of
reasonableness. Such a condition is invalid and it is liable to be Struck down.

It will be open to maintain a civil suit in civil court, within the narrow scope
and on the limited grounds on which they permissible, in the matters relating to an
English mortgage enforceable without intervention of the court.

100 JT 2004 (4) 308 : (2004) 120 Comp cas 373 (SC) : (2004) 51 SCL 513 (SC) : (2004) 4 SCC
311.

249
 We hold that the borrowers would get a reasonably fair deal and opportunity
to get the matter adjudicated upon before the Debt Recovery Tribunal. The effect
of some of the provisions may be bit harsh for some of the borrowers but on that
ground the impugned provisions of the Act cannot be said to be unconstitutional
in view of the fact that the object of the Act is to achieve speedier recovery of the
dues declared as NPAs and better availability of capital liquidity and resources to
help in growth of economy of the country and welfare of the people in general
which would subserve the public interest.

We uphold the validity of the Act and its provisions except that of sub section
(2) of section 17 of the Act, which is declared ultra vires of Article 14 of the
Constitution of India.

Where the secured creditor has taken action under section 13(4) of the Act, in
such cases it would be open to borrowers to file appeals under section 17 of the
Act within the limitation as prescribed therefore, to be counted with effect from
today.

After the Supreme Court decision in Mardia Chemical case,101 necessary

changes are made in the Act. These are the borrower is to make an appeal to the
Debt Recovery Tribunal without deposit of any amount of the claim of the
secured creditor and he can appeal against the order of the Debt Recovery
Tribunal by depositing 50% of the amount claimed by the secured creditor or
i ca
determined by the Debt Recovery Tribunal, whichever is less.

(f) Securitization or Reconstruction Companies

(1) Meaning
Securitization Company

A lender gives loans to borrowers and gets repayment with interest over a
period. The lender would collect the periodic instalments and use them to

10 ‘ Ibid.
102 See the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act,
2004, Section 17.
103 Id. Section 18(1).

250
 finance new loans. This limits has capacity to give fresh loans, as he has to
wait till he recovers the instalments along with interest. Instead of waiting for
a long time, he can pool the loans together and sell his right to receive future
payments from the borrowers of these loans. This is termed as securitization
of loans.104 In Layman’s terms securitization means sale and purchase of
loans. The company which is formed for the purpose of securitization is called
securitization company.105

Reconstruction Company

Asset Reconstruction means acquisition by any securitization or

reconstruction company of any rights or interest of any bank or financial
institution in any financial assistance106 for the purpose of realization of such
financial assistance.107 The company formed for the purpose of Assets
reconstruction is called Reconstruction Company.108

(2) Registration of Companies

These companies are required to obtain a registration certificate109 and have

the minimum amount of Rs 2 crores of owned fund or such other amount not
exceeding fifteen percent of the total financial assets as specified by RBI. In order
to carry on the business of securitization or asset reconstruction. Financial
functions of securitization or reconstruction can be performed as per the
guidelines issued by RBI. RBI would also have the power to cancel a certificate
of registration granted in specified circumstances.110

(3) Acquisition ofRights

These companies may acquire financial assets of any bank or Financial

Institutions issuing a debenture or bond or any other security in the nature of the

104 See P.S. Kaicker, Sick Industrial Companies, (2004), pp.2.58-2.59. See also the Securitization
and Reconsruction of Financial Assets and Enforcement of Security Interest Act, 2002,
Section 2 (l)(z).
105 The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002, Section 2(l)(za).
106 Id. Section 2(1 )(k).
107 Id. Section 2(1 )(b).
108 Id. Section 2(1 )(v).
109 Id. Section 3.
"° Id. Section 4.

251
debenture for consideration.111 When the financial assets acquired by these
companies, the acquirer would be deemed to be the lender and would be entitled
to all the rights of the transferor bank or Financial Institution.112 Moreover, on the
date of acquisition of a financial asset any pending suit, appeal or other
proceeding relating to the financial asset by or against the bank or financial
institution would not abate or be discontinued or in any way be prejudicially
affected by reason of the acquisition by these companies but may be continued,
prosecuted and enforced by or against the companies.113

(4) Measures : Assets Reconstruction

These companies may employ any one or more of the following measures for
assets reconstruction.114

• Ensure proper management of the business of the borrower, by change in, or

takeover of, the management of the business,

• Sale or lease of the business of the borrower, either in whole or in part,

• Rescheduling of payment of debts payable by the borrower,

• Enforcement of security interest by taking passion of secured assets as per the

provisions of the ordinance, or

• Settlement of dues payable by the borrower.

(g) Powers ofReserve Bank of India

Under certain circumstances, RBI may determine the policy and give
directions to these companies regarding to income recognition, accounting
standards, making provisions for bad and doubtful debts, capital adequacy based
on risk weights for assets and also relating to deployment of funds may be, and
such company would be bound to follow the policy so determined and directions
so issued.115

111 Id. Section 5(1).

112 Id. Section 5(2).
113 Id. Section 5(3).
114 Id. Section 9.
115 Id. Section 12(1).

252
 RBI may give directions as to the type of financial assets of a Bank or
Financial Institution which can be acquired,116 procedure for acquisition of such
assets and valuation and the aggregate value of financial assets which may be
acquired. The RBI may call for statements and information regarding business
and affairs of securitization company and reconstruction company from them.117

(h) Enforcement of Security Interest

All secured creditors have been empowered to enforce any security interest
credited in their favour, without the intervention of any court or tribunal.118 Where
any borrower, makes any default in repayment of the secured debt or any debt is
classified by the secured creditor as an NPA, such secured creditor may require
the borrower by notice119 in writing to discharge in full his liabilities within sixty
days from the date of the notice, failing which the secured creditor would be
entitled to exercise all or any of the following enforcement steps.120

• Take possession of the secured assets,

• Take over the management of the secured assets,

• Appoint a manager for the secured assets.121

The secured creditor may request the Chief Metropolitan Magistrate or the
District Magistrate, within whose jurisdiction the secured assets or other
documents may be situated or found to take possession and the latter would take
possession of the assets and documents and forwarded the same to the secured
creditor.122

1.6 Id. Section 12(2).

1.7 M Section 12A. ...
118 Id. Section 13(1). See also the Transfer of Property Act, 1881, Section 69 and the State
Financial Corporation Act, 1951, Section 29.
119 See Id. Section 13(3) which provides that the notice is to give details of the amount payable by
the borrower and of the secured assets subject to the charge of the secured creditor and
Section 13(13) which prohibits the borrower, after from transferring by way of sale, lease etc.
any of his secured assets referred to in the notice, without prior written consent of the secured
creditor after receipt of notice.
120 Id. Section 13(2).
121 Id. Section 13(4).
'22 Id. Section 14.

253
(i) Appeal

(1) Debt Recovery Tribunal

Any person aggrieved by the measures taken by the secured creditor, may
prefer an appeal to the Debt Recovery Tribunal within forty-five days from the
date on which such measures are taken.123 Where a borrower residing in the State
of Jammu and Kashmir, application shall be made to the Court of District Judge
in that State having jurisdiction over the borrower.124

(2) Appellate Tribunal

The person aggrieved by the order made by the Debt Recovery Tribunal may
prefer a further appeal to an Appellate Tribunal within thirty days from the date of
receipt of the order of Debt Recovery Tribunal.125 Both the Debt Recovery
Tribunal and the Appellate Tribunal are required to dispose of the appeal in
accordance with the provisions of the recovery of debts due to Banks and
\Oft
Financial Institutions Act, 1993 and Rules made under it.

The appeal shall not be entertained unless the borrower has deposited with the
Appellate Tribunal fifty percent of the amount of debt due as claimed by secured
• 107
creditors or determined by Debts Recovery Tribunal, whichever is less.

The borrower, residing in Jammu and Kashmir and aggrieved by order made
by the Court of District Judge, may appeal the High Court within thirty days from
the date of receipt of the order.128 The borrower has to deposit fifty percent of the
amount of the debt due as claimed by secured creditors or determined by the
Court of District Judge, whichever is less.129

(I) Central Registry

The Central Government may set up a registry to be known as the Central

Registry having its own seal is for the purposes of registration of transactions of

123 Id. Section 17(1).

124 Id. Section 17A.
125 Id. Section 18(1).
126 Id. Section 17(2).
127 Id. Proviso to section 18(1).
128 Id. Section 18B.
129 Id. Proviso to Section 18B.

254
securitization and reconstruction of financial assets and creation of security
interest.130 Provisions regarding Central Registry would be in addition to and not
in derogation of any of the provisions of any other law requiring registration of
charges and are not to affect the priority of charges or validity thereof under those
Acts or laws.131

(1) Central Registrar

The Central Government would appoint a person, to be known as the Central

Registrar, for the purpose of registration of transactions relating to securitization
and reconstruction of financial assets, and security interests created over
properties and may also appoint other officers for the purpose of discharging
1 99
authorized functions of the Central Registrar under his supervision.

(2) Registration

A record called the Central Register would be kept at the head office of the
Central Registry, for entering the particulars of the transactions relating to
securitization, reconstruction and creation of security interests.134 Particulars of
every transaction of securitization, assets reconstruction or creation of security
interest are to be filed with the Central Registrar within thirty days after the date
1 IS
of such transaction or have creation of security.

The securitization or reconstruction companies the secured creditors to send

the particulars of any modifications of any security interest registered136 and of
the payment or satisfaction in full, of any security interest requiring registration
within thirty days from the date of such payment or satisfaction.

130 Id. Section 20(1).

bl Id. Section 20(4).
132 Id. Section 21(1).
133 Id. Section 21(2).
134 Id. Section 22(1). The Central Register would also be maintained in the electronic form. See
also Section 22(3) and 22(4),
b5 Id. Section 23.
136 Id. Section 24.
137 Id. Section 25.

255
(3) Right to Inspect

Particulars of securitization or reconstruction or creation of security interest

entered in the Central Register would be open for inspection by any person on
payment of a fee.138

(k) Miscellaneous

(l) Non Applicability of the Act

The provisions of the Act would not apply to the following cases139

• a lien on any goods, money or security given by or under any existing law,

• a pledge of movables,

• creation of any security in any aircraft or in any vessel,

• any conditional sale, hire-purchase or lease or any other contract in which no

security interest has been created,

• any rights of unpaid seller,

• properties not liable to attachment under the Code of Civil Procedure. 1908,

• any security interest in any financial asset having the value of less than Rs.
1,00,000,

• any security interest created in agricultural land and

• any case in which the amount due is less than twenty percent of the principal
amount and interest on it.

(2) Overriding Impact

Provisions of the Act would have effect, notwithstanding anything

inconsistent contained in any other law for the time being in force or any
instrument having effect by virtue of any such law.140

138 Id. Section 26.

139 Id. Section 31.
140 Id. Section 35.

256
(3) No Civil Court Jurisdiction

No civil court would not have jurisdiction to entertain any suit or proceeding
in respect of any matter in which Debt Recovery Tribunal or an Appellate
Tribunal is empowered to determine. Further, injunctions can not be to be granted
by any court or other authority in respect of any action taken in pursuance of any
power conferred by under the Act or under the Debt Recovery Tribunal Act.141

(1) No Withdrawal of Application Before Debt Recovery Tribunal to Recourse

under the Sarfasi Act

In Hotel Rajahamsa International v Authorised Officer, Indian Overseas

Bank,142 The Andhra Pradesh High Court held that even if the bank has already
availed of remedy under the Recovery Act, nothing prevent them for invoking the
provisions of the Sarfasi Act.

In Transcore v Union of India,143 the issue before the Supreme Court was
whether the banks or financial institution having elected to seek their remedy
in terms of the Debt Recovery Tribunal Act, 1993 can still invoke the Sarfasi
Act, 2002 for realizing the secured assets without withdrawing or abandoning
the O.A. filed before the Debt Recovery Tribunal under the Debt Recovery
Tribunal Act.

In this case Indian Overseas bank Respondent, filed O.A. before the Debt
Recovery Tribunal, Chennai for recovery of dues from M/s Transcore,
Appellant. The claim was disputed. An interlocutory application was filed by
the bank to bring the properties to sell.

Respondent issued possession notice to Appellant. It stated that was called

upon to repay an amount of Rs. 4.15 crores together with interest within sixty
days and the appellant had failed to repay the amount. The bank had taken
possession of immovable properties mentioned in the schedule to the notice

141 Id. Section 34.

142 (2005) 128 Comp cas 431 (AP). See also Punjab National Bank v Anwar Sherief (2006) 134
Comp cas 456 (Karn.) and Asset Reconstruction Co. (India) Ltd. v Kumar Metallurgical
Corporation Ltd. (2006) 134 Comp cas 438 (DRAT-ch).
143 AIR 2007 SC 712 : (2007) 135 Comp cas 1 (SC).

257
 and the appellant, the guarantor and public in general were directed not to deal
with those immovable properties. As they were subject to the charge of the
bank for the aforesaid amount with interest and cost. The immovable
properties were put to auction. However, pending civil appeal, confirmation of
auction sale had been stayed.

Subsequently, on 11-11-2004 the provisos were introduced in Section

19(1) of the Debt Recovery Tribunal Act vide amending Act 30 of 2004.144

Transcore, the appellant argued that the respondent could not have
invoked the Sarfasi Act under the proviso to Section 19(1) of the Debt
Recovery Tribunal Act without the prior permission of the Tribunal before
whom O.A. was pending. As the proviso has not been compiled with by the
bank and consequently, the Possession Notice issued by the authorized officer
of the bank was illegal and bad in law and liable to be set aside.

The Court held that the Banks and Financial Institutions having elected to
seek their remedy in terms of Debt Recovery Tribunal Act, 1993 can still
invoke the Sarfasi Act, 2002 for realizing the secured assets without
withdrawing or abandoning the O.A. filed before the Debt Recovery Tribunal
under the Debt Recovery Tribunal Act. It is for the Bank or Financial
Institutions to exercise its discretion as to cases in which it nay apply for leave
and in cases where they may not apply for leave to withdraw...

The object behind introducing the first proviso and the third proviso to
Section 19(1) of the Debt Recovery Tribunal Act vide amending Act, 2004 is
to align the provisions of Debt Recovery Tribunal Act, the Sarfasi Act and

144 These provisos are “... Provided that the bank or financial institution may, with the permission
of the Debts Recovery Tribunal, on an application made by it, withdraw the application,
whether made before or after the Enforcement of Security Interest and Recovery of Debts
Laws 9Amendment) Act, 2004 for the purpose of taking action under the Securitization and
Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of
2002), if no such action had been taken earlier under that Act. Provided further that any
application made under the first proviso for seeking permission from the Debts Recovery
Tribunal to withdraw the application made under sub-section (1) shall be dealt with by it as
expeditiously as possible and disposed of within thirty days from the date of such application.
Provided also that in case the Debts Recovery Tribunal refuses to grant permission for
withdrawal of the application filed under this sub-section, it shall pass such orders after
recording the reasons there for.”

258
 0.23, CPC.145 Assuming that an O.A. is filed in the Debt Recovery Tribunal
for recovery of an amount on a term loan, on credit facility and on
hypothecation account. After filing of O.A., on account of non disposal of the
O.A. by the Tribunal due to heavy backlog, the Bank finds that one of the
three accounts has become sub standard, in such a case the Bank can invoke
the Sarfasi Act with or without the permission of the Debt Recovery Tribunal.
One cannot lose sight of the fact that even an application for withdrawal takes
time for its disposal. With inflation in the economy, value of the pledged
property depreciated on day to day basis. If the borrower does not provide
additional asset and the value of the asset pledged keeps on falling then to that
extent the account becomes non performing. Therefore, the bank or financial
institutions is required to move under Sarfasi Act expeditiously by taking one
of the measures by Section 13(4) of the NPA Act. Moreover, O. 23, CPC is an
exception to the common law principle of non suit, hence the proviso to
Section 19(1) became a necessity.

The Act does not bring in any fundamental changes in the tenets of Indian
insolvency laws, most of which have remained untouched. Instead, it may be
regarded as being an extremely useful augmentation to the law of debts
recovery, removing some of the regulatory bottlenecks tormenting the
financial sector146 e.g. reference to Board by borrower companies and opening
speedier avenues for secured creditors to recover their debts.

145 See the code of Civil Procedure, order 23 Rule 1(3) states inter alia that where the Court is
satisfied that there are sufficient grounds for allowing the plaintiff to institute a fresh suit for
the subject matter of a suit or part of a claim then the civil court may, on such terms as it
thinks fit, grant the plaintiff permission to withdraw the entire suit or such part of the claim
with liberty to institute a fresh suit in respect thereof. Under order XXIII, Rule l(l)(4)(b), in
cases where a suit is withdrawn without the permission of the Court, the plaintiff shall be
precluded from instituting any fresh suit in respect of such subject matter. Order XXIII, Rule
2 states that any fresh suit instituted on permission granted shall not exclude limitation and the
plaintiff should be bound by law of limitation as if the first suit had not been instituted. Order
XXIII, Rule 3 deals with compromise of suits. It states that where it is proved to the
satisfaction of the Court that a suit has been adjusted wholly or in part by any lawful
agreement or compromise or where the defendant satisfies the plaintiff in respect of whole or
any part of the subject matter of the suit, the Court shall order such agreement, compromise or
satisfaction to be recorded, and shall pass a decree in accordance with it.
146 See P. Subhashini Mahesh, “Sale under Sarfasi Act vis-a-vis third party rights,” Chartered
Secretary, April 2010, pp.520-525. See also Ashish Pathak, “A new dimension to Debts
Recovery Laws : The Securitization ordinance,” 5 SCC(J) 2002, pp. 17-25 and R.Santhanam,
“Sick Industrial Companies (Special Provisions) Act made. Inoperative, 3 CompLJ, 2003,
pp.213-214.

259
(m)Effect of the SARFASJ Act, 2002 on the Sick Units

The Sarfasi Act, 2002 inserted two provisos in the section 15 of the SICA.
These are :

• The reference shall not be made to the Board for industrial and Financial
Reconstruction after the commencement of the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002, where financial assets have been acquired by any securitization
company or reconstruction company.147

• When the reference is pending before the Board,

• The reference shall abate if the secured creditors, representing not less than
three-fourth in value of the amount outstanding against assistance disturbed to
the borrower of such secured creditors, have taken any measures to recover
this secured debt or after the commencement of the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002.148

(1) Reference can not be made

The sick company will not make any reference to the Board if the financial
assets of the company have been acquired by any securitization company or
. 140
reconstruction company.

(2) Abatement ofReference

Where the reference to the Board is pending, such a reference will abate if the
secured creditors representing not less than three fourth in value of the amount
outstanding against financial assistance disturbed, have taken any measures to
recover their dues.150

147 See the Sick Industrial (Special Provisions) Act, 1985, second proviso to section 15.
148 Id. Third proviso to Section 15.
149 See the Securitization and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002, Section 5(1) which provides that Securitization and Reconstruction
company may acquire Financial Assets of Bank or Financial Institutions by issuing debenture
or bonds and entering into an agreement. See also Supra n.137.
150 Id. Section 13(4). The secured creditor may take possession of secured assets, take over the
management of the business of borrower, appoint any person to manage the secured assets
and require by notice in writing from borrower to pay money due. See Supra n.138. See also
Archana Spinners Ltd. v BIFR (2009) 147 Comp cas 387 (Mad.): (2007) 76 CLA 231, Asset

260
(ii) THE STATE FINANCIAL CORPORATIONS ACT, 1951

The State Financial Corporations Act, 1951 is a Special Act. It provides for
the grant of Financial Assistance to Industrial concerns to boost up
industrialization

(a) State Financial Corporation

The Act empowers the State Government to establish a State Financial

Corporation as a corporate with an authorized capital of such sum as may be fixed
by the State Government in behalf.151 The Central Government may serve the
needs of two or more states.152

(1) Corporation Management

The Act provides that the general superintendence, direction and management
of the affairs and business of the Financial Corporation shall vest in a Board of
Directors which exercise all the powers and discharge all the functions which may
1 's'l
be exercised and discharged the Financial Corporation.

(2) Corporate Business

The Act enumerates the business which the Financial Corporation may
transact. These include among others, guaranteeing, loans raised by industrial
concerns which repayable within twenty years and are floated in the public
market, loans raised by concerns from scheduled banks or State cooperative banks
or other financial institutions and granting loans and advances to an industrial
concern repayable within a period not exceeding twenty years from the date on
which they are granted.154

Reconstruction Co. (India) Ltd. v Kumar Metallurgical Corporation Ltd. (2006) 134 Comp
cas 438 (DRAT-Che) and Triveni Alloys Ltd. v Board for Industrial and Financial
Reconstruction (2006) 132 Comp cas 190 (Mad.) in which an interesting argument was raised
that the proviso will only apply where a reference is pending before the Board and not when a
proceeding is pending before Appellate Authority under section 25 of SICA.
151 The State Financial Corporations Act, 1951, Section 3. See also Sections 4-8.
152 Id. Section 3A.
I5j Id. Section 9. See also Section 10-15.
154 Id. Section 25.

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(b) Powers of Corporation

(1) Take over of Management

If an industrial concern, makes any default in repayment of any loan or

advance or any instalment or otherwise fails to comply with the terms of its
agreement with the Financial Coiporation, Financial Corporation may take over
the management or possession or both of the industrial concern. They also have
right to transfer by way of lease or solo and realize the property pledged,
mortgaged, hypothecated or assigned to the Financial Corporation.155

(2) Recall Loan Prematurely

The Financial Corporation may require an industrial concern to discharge

immediately in full its liabilities to the Financial Corporation if the industrial
concern gave false or misleading information or fails to comply with the terms of
the contract or without permission of the Board remove any machinery or plant
whether forming part of security or not.156

(3) Sale

If industrial concern, makes any default in repayment for any loan or advances
or otherwise fails to comply with the terms of the agreement with the Financial
Corporation or the Financial Corporation requires an industrial concern to make
immediate repayment of any loan or advance and industrial concern fails to make
such repayment, any officer of the Financial Corporation may apply to the District
Judge for an order for the sale of the property pledged, mortgaged, hypothecated
or assigned to Financial Corporation as security for the loan or advance or for
enforcing the liability of any surety or for transferring the management of the
Industrial concern to the Financial Corporation and for an ad interim injunction
restraining the industrial concern from transferring or removing its machinery or
plant without the permission of the Board.157

155 Id. Section 29. See also Sections 32A-32D.

156 Id. Section 30.
157 Id. Section 31.

262
(c) Over Riding Impact

The Act provides that the provisions of the Act and any rule or order made
under shall have effect notwithstanding anything inconsistent there with in any
other law for time being in force. It further says that the provisions of the Act
shall be in addition to, and the in derogation of, any such law applicable to an
industrial concern. It will thus be seen that the consequences of a take over of the
industrial concern are quite drastic and virtually denudes the Management of such
industrial concern of its power to administer the properties and assets of such
concern.158

(d) The State Financial Corporation Act, 1951 vis-a-vis the Sick Industrial
Companies (Special Provisions) Act, 1985

The Supreme Court in Maharashtra Tubes Ltd. v State Industrial and

Investment Corporation ofMaharastra Ltd. and Another,159 held :

“... both the 1951 Act and the 1985 Act are special statues, each having a
different objective, the emphasis in the case of the former being on giving of
financial assistance to entrepreneurs for setting up industries while in the case of
the latter it being to revive or rehabilitate industries which have on account of
economic or other related reasons gone sick. No doubt the latter Act also
contemplates giving of financial assistance for revival or rehabilitation of a sick
industrial undertaking but that is by way of a remedy or as measure at revival of
the sick unit.”

In this case the appellant company was incorporated in 1980 and

manufacturing steel pipes/tubes etc. of various size and dimensions within a
couple of years it ran into difficulties on account of strikes, financial constraints,
etc. which necessitated the cessation of manufacturing activities. Since the
company had run into serious financial problems on account of accumulated
losses and paucity of cash flow, it wrote a letter to the Board enclosing a

158 Id. Section 46A.

159 (1993) 2 SCC 144 : (1993) 2 Comp LJ 346 (SC): JT 1993 (1) SC 310 : 1993 (1) SCALE 223,
(1993) 1 SCR 340 : (1993) 78 Comp cas 803 (SC).

263
provisional balance-sheet for the year ended 30th June, - 1988 showing the
accumulated losses and sought financial assistance for revival of the unit. The
Director of the Board replied that there are certain deficiencies in the statements
accounts and desired the company to report the sickness in Form A and to take
appropriate action under Section 15(1) of the 1985 Act. The Company submitted
the proposal in form A showing accumulated losses.
f

Since the information in regard to the total number of workers employed by

the company at the relevant date was not clear and the company had also not
submitted the audited accounts for the financial year ended 31st March, 1991.
Therefore reference is dismissed.

When the Board dismissed the Reference, the first respondent initiated
proceedings under Section 29 of the 1951 Act for taking over possession of the
factory premises of the company. In the meantime the company filed an appeal
under Section 25 of the 1985 Act against the impugned order of the Board. On the
same day the company also sent a letter to the first respondent requesting it to stay
his hands in view of the provisions of Section 22(1) of the 1985 Act. Thereupon,
the first respondent wrote a letter to the Appellate Authority for permission to
take possession of the assets of the company. The company challenged this action
before the High Court of Bombay by a Writ Petition. The controversy before the
High Court was whether the bar of Section 22(1) of the 1985 Act applied to
proceedings initiated under section or of the 1951 Act.

The High Court held that section 29(1) of the State Financial Corporations
Act, 1951 would not attract the bar of section 22(1) of 1985 SICA because it
would render the provisions under section 29(1) of 1951 Act nugatory. Hence the
High Court dismissed the petition.

An Appeal was made against the order of High Court. The Supreme Court
held:

“ ... both the 1951 Act and the 1985 Act are special statutes dealing with
different situations. Both the statutes have competing non-obstante provisions.
Section 46B of the 1951 Act provides that the provision of the statute and of any

264
rule or order made there under shall have effect notwithstanding anything
inconstant there with contained in any other law for the time being in force
whereas Section 32(1) of the 1985 Act also provides that the provisions of the
said Act and of any rules or schemes made there under shall contained in any
other law. Section 22(1) also carries a non-obstante clause and says that the said
provision shall apply notwithstanding anything contained in Companies Act, 1956
or any other law. The 1985 Act being a subsequent enactment, the non-obstante
clause therein would ordinarily prevail over the non-obstante clause found in
Section 46B of the 1951 Act unless it is found that the 1985 Act is a general
statute and the 1951 Act is a special one. In that event the maxim generalia
specialibus non derogant would apply. But in the present case on a consideration
of the relevant provisions of the two statutes we have come to the conclusion that
the 1951 Act deals with post-sickness situation. It is, therefore, not possible to
agree that the 1951 Act is a special statute vis-a-vis the 1985 Act which is a
general statute. Both are special statutes dealing with different situations
notwithstanding a slight overlap here and there. For example, both of them
provide for grant of financial assistance through in different situations. We must,
therefore, hold that' in case of sick industrial undertakings the provisions
contained in the 1985 Act would ordinarily prevail and govern.”

H. REVIEW

The elaborate provisions for revival and rehabilitation of sick industrial

companies under the new scheme do not apparently provide for a moratorium
automatically of providing a stay of collection and recovery of moneys due from
the sick units or for filing of the cases in civil courts for claim nor is there a
corresponding provision similar to section 22 of SICA which conferred a statutory
right of stay of recovery and protection for enlargement of the period Of limitation
for claims.

The new scheme does not also envisage the intervention of any court at the
stage of proceedings before the Tribunal since the Tribunal itself is sought to be
conferred vast powers to cover and deal with all matters relating to the sick

265
industrial company not only for revival and rehabilitation wherever possible but
also for winding up and liquidation where no revival/rehabilitation is found to be
feasible.

The time frame within the Tribunal has to work and all the concerned persons
agencies have to carry out the orders and directions for implementations
expeditiously would perhaps be taken as justifying the absence of a provision like
section 22 circumstances in which the bank accounts of the sick company may be
attached and properties detained or frozen by the creditors, tax authorities, courts,
etc. in various proceedings under different laws which may came into conflict
with the orders and directions of the Tribunal making the sick industrial company
and others connected with it enable to carryout the orders and directions. The
Tribunal not being competent to decides all disputes arising under other laws vis-
a-vis the sick company and its opponents or claimant in India, or elsewhere, the
problems of coordinating with the proceedings and orders of different courts,
tribunals and authorities, within or outside India, will be quite difficult for the
Tribunal to handle. The Tribunal is yet to be established and time will tell how
effectively it will substitute Board and Appellate Authority and the High Court.
There indeed is too much for the Tribunal to handle !

The Securitization and Reconstruction of Financial Assets and Inforcement of

Security Interest Act, 2002, helps banks and financial institutions to inject
liquidity160 in their investments in financial assets by enabling them to convert
their assets into securities through the contrivance of a securitization company.
Capable of being traded in smaller bundles, these securities would fetch
immediate liquidity which can be utilized for productive endeavours, instead of
waiting patiently for loan realization, facilitating setting up of reconstruction
companies, special purpose vehicles, which would recover the bad assets of banks
or Financial Institutions and helping banks and Financial Institutions to enforce
their security interest in a smooth and efficient manner.

160
Liquidity means quality or State of being readily convertible to cash. See Black Law’s
Dictionary 8lh ed. P.950.

266
 Both the State Financial Corporations Act, 1951 and The Sick Industrial
Companies (Special Provisions) Act 1985 are special statutes but the 1985 Act
being a subsequent enactment prevail over the 1951 Act.161

— KKKK—

161 See Supra n. 159.

267