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July 13, 2012

Protection under BIFR

Realising the seriousness of the problem of sick industrial undertakings financed by the banks, the central government passed an Act known as “Sick Industrial Companies (Special Provisions) Act, 1985 (SICA)”. Under this Act, the Board of Financial & Industrial Reconstruction (BIFR) and an appellate authority known as AAIFR (Appellate Authority for Industrial & Financial Reconstruction) were set up in New Delhi. Under this, every company is obligated to register itself as a sick company once its net worth is completely eroded.

Initially this was confined to public limited companies but later in 1991, public sector undertakings were also included. Detailed instructions are stipulated for the sick undertaking and the lending institutions about their responsibilities. First an Operating Agency (one of the lending institutions) is appointed to make a study and work out a draft scheme to decide on whether it is worthwhile reviving the undertaking and if so with what conditions, reliefs, etc. OR certify the undertaking can be wound up.

No legal action can be taken against the borrower by anyone once an undertaking is under the purview of BIFR under Section 22 of the Act which is considered an essential protection for a rehabilitation of revivable entities. The financing institutions need not necessarily agree to the scheme of rehabilitation.

Over the years, it has been found that the borrowers take full advantage of the protection under Section 22 and carry on their operations, even if truncated, with the help of some other friendly bank or on their own and drag the proceedings in BIFR by seeking adjournments of hearing, going in appeal to the AAIFR on some technicality or the other, submitting unacceptable one-time settlement proposals for a fraction of what is owed with repayment spread over several years.

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