Revival and Rehabilitation of Sick Companies
1. Where on a demand by the secured creditors of a company representing fifty per cent. or more of its outstanding amount of debt, the company has failed to pay the debt within a period of thirty days of the service of the notice of demand or to secure or compound it to the reasonable satisfaction of the creditors, any secured creditor may file an application to the Tribunal in the prescribed manner along with the relevant evidence for such default, non-repayment or failure to offer security or compound it, for a determination that the company be declared as a sick company.
2. The applicant under sub-section (1 ) may, along with an application under that subsection or at any stage of the proceedings thereafter, make an application for the stay of any proceeding for the winding up of the company or for execution, distress or the like against any property and assets of the company or for the appointment of a receiver in respect thereof and that no suit for the recovery of any money or for the enforcement of any security against the company shall lie or be proceeded with.
3. The Tribunal may pass an order in respect of an application under sub-section (2 ) which shall be operative for a period of one hundred and twenty days.
4. The company referred to in sub-section (1 ) may also file an application to the Tribunal on one or more of the grounds specified in sub-sections (1 ) and (2 ) above.
5. Without prejudice to the provisions of sub-sections (1 ) to (4 ), the Central Government or the Reserve Bank of India or a State Government or a public financial institution or a State level institution or a scheduled bank may, if it has sufficient reasons to believe that any company has become, for the purposes of this Act, a sick company, make a reference in respect of such company to the Tribunal for determination of the measures which may be adopted with respect to such company:
Provided that: a reference shall not be made under this sub-section in respect of any company by—
a. the Government of any State unless all or any of the undertakings belonging to such company are situated in such State;
b. a public financial institution or a State level institution or a scheduled bank unless it has, by reason of any financial assistance or obligation rendered by it, or undertaken by it, with respect to such company, an interest in such company.
6. Where an application under sub-section (1 ) or sub-section (4 ) has been filed,
a. the company shall not dispose of or otherwise enter into any obligation with regard to, its properties or assets except as required in the normal course of business;
b. the Board of Directors shall not take any steps likely to prejudice the interests of the creditors.
7. The Tribunal shall, within a period of sixty days of the receipt of an application under sub-section (1 ) or sub-section (4 ), determine whether the company is a sick company or not:
Provided that: no such determination shall be made in respect of an application under sub-section (1 ) unless the company has been given notice of the application and a reasonable opportunity to reply to the notice within thirty days of the receipt thereof.
8. If the Tribunal is satisfied that a company has become a sick company, the Tribunal shall, after considering all the relevant facts and circumstances of the case, decide, as soon as may be, by an order in writing, whether it is practicable for the company to make the repayment of its debts referred to in sub-section (1 ) within a reasonable time.
9. If the Tribunal deems fit under sub-section (8 ) that it is practicable for a sick company to pay its debts referred to in that sub-section within a reasonable time, the Tribunal shall, by order in writing and subject to such restrictions or conditions as may be specified in the order, give such time to the company as it may deem fit to make repayment of the debt.
Legal Commentary & Landmark Judgments: Section 253
Section 253 historically governed the determination of corporate sickness by the Tribunal under Chapter XIX; omitted by the Insolvency and Bankruptcy Code, 2016, its sickness-based framework was replaced by the creditor-driven default mechanism under Part II of the IBC.
Advise corporate clients that corporate sickness is no longer an actionable ground or defense under company law. Any revival or debt restructuring must proceed via CIRP under Section 7, 9, or 10 of the IBC, where proof of debt and default exceeding the statutory threshold of one crore rupees is the sole jurisdictional prerequisite.