contents

Definition

of sickness. Causes of sickness. Symptoms of sickness.

DEFNITION OF SICKNESS
I. II.

There are two ways of looking at insolvency. The stock-based insolvency. The flow-based insolvency. The RBI defined sick units as

One which has incurred cash losses for one year and, in the judgment of the financing ban, is likely to incur cash losses for the current as well as the following year and / or there is an imbalance in the units' financial structure, that is, current ratio is less than 1:1 and debt / equity ratio is worsening

The companies (Second Amendment) Act, 2002 defines a Sick Company as one: Which has accumulated losses in any financial year equal to 50 percent or more of its average net worth during four years immediately preceding the financial year in question, or Which has failed to repay its debts within any three consecutive quarters on demand for repayment by its creditors. An industrial unit may be regarded as sick if (i) it faces financial embarrassment (arising out of its inability to honour its obligations as and when they mature), and (ii) its viability is seriously threatened by adverse factors.

(a)

(b)

CAUSES OF SICKNESS

Unfavorable external environment. Managerial deficiencies. I. Production II. Marketing III. Finance IV. Personnel

UNFAVOURABLE EXTERNAL ENVIRONMENT

Shortage of key inputs like power and basic raw materials. Changes in government policies Development of new technology Shift in consumer preferences Sudden decline in the orders from the government Natural calamities Reduced lending by financial institutions

MANAGERIAL DEFICIENCIES
Production Improper location Wrong technology Uneconomic plant size Weak production and quality control Inadequate emphasis on R&D Unsuitable plant and machinery Poor maintenance

Marketing Inaccurate demand projection Improper product mix Wrong product positioning Irrational price structure. Inadequate sales promotion Poor customer service High distribution costs

Finance Wrong Capital Structure Bad investment decisions Weak budgetary control Absence of responsibility accounting Inadequate management information system Poor management of receivables Bad cash planning and control Strained relationship with the suppliers of capital

Personnel Ineffective leadership Bad labour relations Inadequate human resources Over Staffing Weak employee commitment Irrational compensation structure

SYMPTOMS OF SICNESS

Delay or default in payment to suppliers. Irregularity in the bank account. Delay or default in payment to banks and financial institutions. Non-submission of information to banks and financial institutions. Frequent requests to banks and financial institutions for additional credit. Decline in capacity utilization. Poor maintenance of plant and machinery.

Low turnover of assets.

Accumulation of inventories.
Inability to take trade discount.

Excessive turnover of personnel.

Extension of accounting period. Resort to creative accounting which seeks to present a better financial picture than what it really is. Decline in the price of equity shares and debentures.